DBRS Limited (DBRS Morningstar) confirmed both Canadian Utilities Limited’s (CUL or the Holdco) Issuer Rating and Unsecured Debentures rating at A, its Commercial Paper rating at R-1 (low), and Cumulative Preferred Shares rating at Pfd-2. All trends are Stable. The rating confirmations reflect (1) the Holdco’s solid consolidated and nonconsolidated credit metrics, strong liquidity, and reasonable leverage at the Holdco level; (2) the strong credit profile at its sizable and diversified regulated subsidiaries, particularly at CU Inc. (CUI; rated A (high) with a Stable trend by DBRS Morningstar); and (3) stable cash flow from its regulated natural gas distribution operations in Australia (AGA). CUI and AGA accounted for most of CUL’s consolidated cash flow in 2023 and are expected to contribute approximately 92%–95% of CUL’s cash flow in the medium term. CUL's ratings incorporate the structural subordination of its debt to the debt issued by CUI as well as AGA.
CUI’s ratings serve as a basis for CUL's ratings. DBRS Morningstar estimates CUI accounted for more than 90% of the Holdco’s consolidated cash flow. CUI is one of the largest and most diversified regulated utilities in Canada, with a rate base of approximately $13.6 billion as at mid-year 2022. On July 25, 2023, DBRS Morningstar confirmed the A (high) rating of CUI. Please see DBRS Morningstar’s report on CUI dated August 4, 2023, for details.
AGA is a regulated natural gas distribution in Western Australia, which has provided stable cash flow contribution to CUL. CUL projects AGA's cash flow to remain stable in the medium term.
At the Holdco level, CUL's current leverage remained reasonably low but increased modestly from the 2022 level as a result of temporary bridge financing of acquisition of the renewable power generation from Suncor Energy Inc. for approximately $713 million, of which approximately $300 million is projected to remained outstanding at the end of 2023 and the remainder will be paid off in 2024 with internal-generated cash flow. The acquired asset, under long-term contract, is very small compared with CUL's total assets and will have no material impact on CUL's current business risk profile. CUL maintained strong liquidity at the end of June 2023 with approximately $439 million in cash, and approximately $632 million committed credit facilities and $230 million demand credit facilities at the Holdco level.
DBRS Morningstar does not expect to take a positive rating action on CUL’s ratings because these are largely constrained by CUI’s ratings. However, the following factors could place pressure on CUL’s current ratings, should they occur: (1) adverse changes in regulation in Alberta that negatively affect CUI’s ratings; (2) a change in the business mix that would reduce the cash flow contribution from CUI to CUL’s overall consolidated cash flow; (3) a material increase in consolidated and/or nonconsolidated leverage; and (4) a substantial increase in nonregulated operations at the Holdco on a sustained basis.
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: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022; https://www.dbrsmorningstar.com/research/404334)
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (Feb 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.
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 firstname.lastname@example.org.
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.
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.
Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577