DBRS Confirms Canadian Utilities Limited at “A”/R-1 (low)/Pfd-2 (high), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of Canadian Utilities Limited (CU, the Company or Holdco) at “A,” the Commercial Paper rating at R-1 (low) and the Cumulative Preferred Shares Rating at Pfd-2 (high). All trends are Stable. The confirmations reflect solid financial performance at CU’s sizable and diversified regulated subsidiaries, stable regulations in Alberta and Australia, and modest and manageable exposure in the higher-risk non-regulated business. DBRS includes a one-notch uplift in the rating of Cumulative Preferred Shares issued, largely because of low non-consolidated leverage and strong cash balances supported by the Company’s liquidity policy.

CU’s consolidated financial profile strengthened in 2016 and improved further in the first half of 2017. The consolidated debt in capital structure remained stable at 60%, which is supportive of the current rating for the holding company, which has approximately 84% of consolidated earnings from regulated subsidiaries. Consolidated cash flow-to-debt and consolidated interest coverage improved over the past 18 months, reflecting (1) incremental cash flow from substantial investments in the regulated business at CU Inc. (CUI; 100% owned by CU; rated A (high) by DBRS) in the 2012–2015 period and (2) solid contribution from the regulated gas distribution business in Australia. Liquidity remains strong as CU is expected to maintain material cash balances of around $400 million to $500 million over the next several years.

From a non-consolidated perspective, CU’s non-consolidated financial profile remained solid in 2016, underpinned by the following factors: (1) low non-consolidated leverage at around 13% and (2) a strong cash flow-to-non-consolidated debt ratio. DBRS notes that the debt issued by the Holdco is structurally subordinated to the debt issued by CUI and its other subsidiaries. However, the structural subordination is somewhat mitigated by the sizable and well-diversified operations.

DBRS notes that CU’s business risk profile is negatively affected by the higher risk of its non-regulated business, which consists mostly of power generation in Alberta and Australia. The non-regulated business faces several major risks, such as power price volatility, reconstructing risk and regulatory risk in Alberta. However, DBRS recognizes that these risks are partially mitigated by power contractual arrangements and the relatively small scale of non-regulated activities. For the full year 2017, it is estimated that non-regulated operations will only account for 12% of assets and 14% of consolidated cash flow. In addition, the debt issued by non-regulated subsidiaries (except non-recourse debt at the project level) accounted for only 1% of consolidated debt at June 30, 2017.

CU owns an 80% interest in the Alberta Power Line (APL) Project, a 500-kilometre transmission line between the Wabamun and Fort McMurray areas. Costs for the APL Project are estimated at $1.4 billion, of which $1.2 billion will be financed through non-recourse project debt. CU intends to fund its equity portion through excess cash from operations and its Dividend Reinvestment Program (DRIP). DBRS does not expect the funding of the APL Project to have a material impact on CU’s credit metrics during the construction.

DBRS is of a view that there is a limited opportunity for the rating to move up. However, the following factors, if they occur, could pressure the current “A” rating: (1) a material increase in consolidated and non-consolidated leverage, (2) a significant increase in non-regulated operations, or (3) adverse changes in regulation in Alberta that negatively affect the rating of CUI.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry; DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, Commercial Paper Liquidity Support for Non-Bank Financial Issuers; and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

DBRS 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 info@dbrs.com.