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 and strong financial flexibility as well as its 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; (2) a majority of CUI's cash flow is under cost-of-service (COS) regulation where the Company can reasonably recover costs incurred to provide essential services if these costs, including inflation and interest costs, are deemed prudent by the regulator.
The Company’s return on equity and equity thickness remains stable in 2023 at 8.5% and 37%, respectively. CUI's distribution businesses operated under COS regulation in 2023, which is the rebasing year, and will be under the third performance-based regulation for the 2024–28 period. DBRS Morningstar expects that the 2023 COS will benefit CUI in coping with high inflation and cost recovery. Cash flow is expected to remain very solid in 2023 but is also expected to be modestly lower than that of 2022 in the absence of the deferred revenues collected in 2022 in relation to rate relief provided to customers in 2021.
The Company's 2022 and 2023-to-date credit metrics were solid and largely reflected 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%. 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 2023 and 2024. The Company's liquidity remained strong at the end of Q1 2023 with approximately $1.2 billion in available credit facilities, cash, and equivalents. The planned capex for the next three years is similar to the 2022 level at approximately $1.0 billion each year. The capex program will be spent on a modest customer growth and on the Company’s existing operations, system reliability, and integrity. 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 solid in 2023 and 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.
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/416784 (July 4, 2023).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616)
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuer (October 20, 2022; https://www.dbrsmorningstar.com/research/404248)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)
The credit rating methodologies used in the analysis of this transaction can be found at:
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
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