DBRS Confirms Ratings on Canadian Utilities Limited at "A," R-1 (low) and Pfd-2 (high), Stable

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Debentures rating on Canadian Utilities Limited (CU or the Holdco) at “A” as well as its Commercial Paper rating at R-1 (low) and its Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable. The confirmations reflect (1) the Holdco’s solid financial profile; (2) its sizable and diversified regulated subsidiaries, particularly at CU Inc. (CUI; rated A (high) with a Stable trend by DBRS); and (3) a substantial reduction in its higher-risk non-regulated generation business. The Holdco’s ratings incorporate the subordination of its debt to the debt issued by CUI and its other subsidiaries. DBRS includes a one-notch rating uplift to CU’s Cumulative Preferred Shares, largely because of the low non-consolidated leverage and strong liquidity at the Holdco level.

CU’s ratings are largely based on those of CUI ratings, which is 100% owned by the Holdco. On July 17, 2019, DBRS confirmed the A (high) rating of CUI. CUI accounted for approximately 84% of the Holdco’s segment adjusted earnings in 2018 and is one of the largest and most diversified regulated utilities in Canada with a rate base of approximately $12.2 billion as at mid-year 2018. CU is in agreements to sell its Canadian generation assets for $835 million as well as its 80% interest in the Alberta PowerLine (APL) project, a 500-kilometre transmission line between the Wabamun and Fort McMurray areas in Alberta. Total proceeds of the APL sale (on a 100% basis) are approximately $300 million plus the assumption of approximately $1.4 billion of APL debt. In 2018, the Holdco’s regulated utilities (i.e., CUI and the Australia regulated operations) accounted for approximately 92% of its segment adjusted earnings, excluding earnings from APL. DBRS expects contributions from CU’s regulated operations to increase following the proposed sales.

CU’s financial risk profile remained relatively stable, despite modestly weaker consolidated credit metrics in 2018, which largely reflected lower earnings and cash flows at CUI because of low going-in rates for the second-generation Performance Base Regulation (PBR). The Holdco’s consolidated metrics, however, improved in the first half of 2019 and are expected to continue to improve throughout the term of the PBR from 2018 to 2022. From a non-consolidated perspective, CU’s non-consolidated financial profile remained strong in 2018, supported by low non-consolidated leverage and a strong cash flow-to-non-consolidated debt ratio.

DBRS does not expect positive rating actions on CU’s ratings because they are largely constrained by CUI’s ratings; however, the following factors, if they occur, could pressure the Holdco’s ratings: (1) a material increase in consolidated and non-consolidated leverage, (2) a substantial increase in non-regulated operations (which DBRS deems unlikely, given the current business strategy) or (3) adverse changes in regulation in Alberta that negatively affect CUI’s 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, DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.

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 info@dbrs.com.

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

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.

For more information on this credit or on this industry, visit www.dbrs.com.

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