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

DBRS Limited (DBRS Morningstar) confirmed CU Inc.’s (CUI or the Company) Issuer Rating and Unsecured Debentures & Medium-Term Notes rating at A (high). DBRS Morningstar also confirmed the ratings on 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 solid credit metrics, strong financial flexibility, and resiliency in coping with high inflation and rising interest rates.

DBRS Morningstar notes that CUI's ability to cope with high inflation and rising interest rates remains solid, reflecting the following factors: (1) a substantial portion of CUI’s cash flow is from operations such as electricity transmission, natural gas transmission, and natural gas distribution that have no or minimal volume risk; and (2) a majority of CUI's cash flow is under cost-of-service (COS) regulation, whereby CUI can reasonably recover costs incurred to provide essential services if these costs, including inflation and interest costs, are deemed prudent by the regulator.

The regulatory framework in Alberta has remained stable, and there has been no change in the Company’s return on equity of 8.5% and equity thickness of 37% for the 2022 period (same as the 2018 to 2021 period). CUI's distribution businesses are in the final year of the five-year Performance-Based Regulation (PBR) term. In the June 2021 decision issued by the Alberta Utilities Commission, Electricity Distribution and Natural Gas Distribution will be under a one-year COS in 2023 and will be under the third term PBR from 2024 through 2028. DBRS Morningstar expects that the 2023 COS will further benefit CUI in terms of coping with high inflation.

The Company’s financial performance in 2021 remained solid but was slightly weaker than 2020, largely reflecting the timing of settlements related to regulatory decisions. However, CUI's credit metrics improved for the last 12 months ended March 31, 2022. CUI's 2022-to-date metrics largely reflect its continued rate base growth, reasonable leverage, 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 has only a modest amount of long-term debt due in 2022. CUI's liquidity remained strong at the end of Q1 2022 with approximately $1.24 billion in available credit facilities, cash, and equivalents. DBRS Morningstar expects CUI to plan manageable capital expenditures (capex) in the medium term. The capex program will be spent on modest customer growth and on the Company’s existing operations, system reliability, and integrity. Capex in 2022 will likely be consistent with the 2021 level. CUI expects to finance a majority of its capex with internal cash flow and the remaining with external debt. The Company commits to financing its capex in a manner that will maintain its capital structure consistent with the regulatory capital structure; as a result, DBRS Morningstar expects CUI's credit metrics to remain relatively stable in the medium term.

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 as a result of any adverse regulatory decisions or business decisions by CUI that could weaken its business profile, or if its key credit metrics weaken significantly from the current level for a sustained period of time.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 24, 2021; https://www.dbrsmorningstar.com/research/384922), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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 additional 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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