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

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Debentures & Medium-Term Notes rating of CU Inc. (CUI or the Company) at A (high) as well as its Commercial Paper rating at R-1 (low) and its Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable. The rating confirmations reflect CUI’s stable business risk profile and solid financial performance for the last 12 months ended March 31, 2019, despite modestly weaker results following the end of the first-generation Performance-Based Regulation (PBR) in 2017. The Stable trends incorporate DBRS’s expectation that the Company will maintain stable credit metrics throughout the second-generation PBR term from 2018 to 2022.

CUI’s credit metrics weakened modestly in 2018, but improved slightly in Q1 2019. Modestly weaker metrics in 2018 reflected lower going-in rates under the second-generation PBR, which did not have a material impact on the Company’s credit profile. Given CUI’s strong business risk profile, DBRS believes that the Company’s credit metrics will continue to support the current ratings through the second-generation PBR term. Furthermore, as the rate base grows, DBRS expects that incremental earnings and cash flows should partially offset the negative impact of lower going-in rates. DBRS notes that CUI continues to earn the allowed return on equity of 8.50% with equity thickness at 37% through 2020. As the terms of the second-generation PBR are not materially different from the previous PBR, DBRS expects CUI’s business risk profile to remain stable over the medium term.

Capex for 2019 is estimated to be approximately $1.0 billion, significantly lower than during Alberta’s Big Build period. Financing capex is manageable and should not pressure the current ratings as CUI intends to finance most of its capex with internally generated cash flow surplus (after dividends) and new debt issuances with minimal or no equity required from the parent. DBRS expects the Company to maintain its dividend policy such that CUI will maintain sufficient cash flow to finance capex without a material increase of debt in the capital structure. Based on the current regulatory environment in Alberta, an upgrade to CUI’s ratings is not likely in the medium term. Although unlikely, CUI’s ratings could come under pressure if its business risk profile deteriorates materially or its key credit metrics weaken significantly from the current level for a sustained period of time.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, 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 & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The 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 addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com.

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