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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Unsecured Debentures & Medium-Term Notes rating of CU Inc. (CUI or the Company) at A (high). DBRS Morningstar also confirmed the ratings of the Company’s Commercial Paper at R-1 (low) and Cumulative Preferred Shares at Pfd-2 (high). All trends are Stable. The rating confirmations reflect CUI’s stable business risk profile and its resiliency to cope with the ongoing Coronavirus Disease (COVID-19) pandemic as well as its solid credit metrics up to the last 12 months (LTM) ended March 31, 2020. The confirmations also incorporate DBRS Morningstar’s expectation that CUI will maintain its credit metrics at levels consistent with the current ratings throughout the remaining years of the second-generation performance-based regulation (PBR) term through 2022 and that there will be no adverse regulatory decision that could materially affect CUI’s credit risk profile.

DBRS Morningstar notes that the coronavirus pandemic had no material impact on CUI’s operational and financial performance in Q1 2020 and Q2 2020 (estimate). DBRS Morningstar expects that the potential impact of the coronavirus pandemic on CUI’s credit metrics for 2020 and 2021 will likely be modest. This expectation is based on the following factors:

(1) CUI provides essential services and there have been no major interruptions from an operational perspective and from a reliability perspective.

(2) A substantial portion of CUI’s cash flow is from operations such electricity transmission, natural gas transmission, and natural gas distribution that have no volume risk or have adjustment mechanisms to recover the variation in volume consumption, whereas volume risk in the electricity distribution business is mitigated with rate plans such as minimum load and fixed cost recovery.

In addition, the decline in demand caused by the coronavirus pandemic for consumption by industrial customers is partially offset with increasing consumption by residential customers.

The regulatory framework in Alberta has remained stable as CUI is in the third year of the five-year PBR term. DBRS Morningstar notes the following legislative/regulatory decisions:

(1) In March 2020, the Government of Alberta announced a 90-day utility payment deferral program (Deferral Program) to provide support to Albertans in order to manage the financial challenges caused by the coronavirus pandemic. As of the end of 90 days (on June 18, 2020), customers are now required to work with their retailers to pay back all the deferred amounts over the next 12 months to June 2021. CUI expects that the Deferral Program would not have material impact on its utilities, with the exception of gas transmission costs. The estimate of the deferred payments on gas transmission costs is modest and manageable given the Company’s strong liquidity position with available credit facilities and cash of over $1.0 billion as at June 30, 2020.

(2) The Alberta Utilities Commission (AUC) suspended the 2021 Generic Cost of capital (GCOC) proceeding, which was initiated in December 2019. The GCOC proceeding will determine, among other things, allowed return on equity (ROE) and equity thickness for 2021 and 2022. The suspension does not have any impact on CUI’s current ROE and equity thickness as CUI continues to earn an allowed ROE of 8.5% on equity thickness of 37%, unchanged from 2019.

The Company’s financial profile remained strong. CUI’s credit metrics improved modestly in 2019 from 2018 and remained solid for the LTM ending March 31, 2020. Stronger metrics largely reflected CUI’s continued growth in rate base and operational efficiency. CUI has maintained its capital structure consistent with the regulatory capital structure with equity thickness of 37% and the Company does not expect to change the debt/capital ratio target going forward. CUI’s refinancing risk is low as it only has $100 million in long-term debt due in the second half of 2020 and $160 million due in 2021. At the end of 2019, CUI announced its capital expenditure (capex) program for 2020 of approximately $1.0 billion, mostly for growth projects. In light of the coronavirus pandemic, CUI announced a reduction of the 2020 capex plan to optimize free cash flow and liquidity. This reduction would have no impact on the Company’s existing operations, system reliability, and integrity. Lower expected capex will likely reduce CUI’s 2020 external debt financing requirements. As a result, DBRS Morningstar expects CUI’s financial strength and its currently solid credit metrics to remain resilient to mitigate any potential effect of the coronavirus pandemic in 2020.

Based on the currently low oil price environment and the ongoing pandemic, DBRS Morningstar does not expect to take any positive rating action on CUI in the medium term. Though unlikely, CUI’s ratings could come under pressure if its business risk profile deteriorates materially due to any adverse regulatory decisions or CUI’s business decisions that could weaken its business profile or its key credit metrics weaken significantly from the current level for a sustained period of time.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (September 16, 2019); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019); and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), which can be found dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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