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 the ongoing Coronavirus Disease (COVID-19) pandemic to date.

DBRS Morningstar notes that the coronavirus pandemic had no material impact on CUI’s operational and financial performance in 2020 and Q1 2021. DBRS Morningstar expects that the impact of the coronavirus pandemic on CUI’s credit metrics for 2021 will continue to be modest, reflecting the following factors: (1) CUI provides essential services, and there have been no major interruptions from an operational perspective or from a reliability perspective; and (2) 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 volume risk or have adjustment mechanisms to recover the variation in volume consumption, whereas volume risk in the electricity distribution business is mitigated with rate plans such as minimum load and fixed cost recovery.

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 2021 and 2022 period (same as the 2018 to 2020 period). CUI is in the final two years of the five-year Performance-Based Regulation (PBR) term. In the June 2021 decision issued by the Alberta Utilities Commission (AUC), Electricity Distribution and Natural Gas Distribution will be under a one-year cost-of-service in 2023 and will be under the third term PBR from 2024 through 2028. DBRS Morningstar notes that in March 2021, CUI filed a 2021 rate relief application for Electricity Distribution and Natural Gas Distribution to postpone rate increases for the full year 2021. In June 2021, the AUC directed CUI to collect the deferred amount commencing January 1, 2022. The collection may be spread over a two-year period (or longer to ensure no rate shock on customer bills). The 2021 rate increase delay reflects the Company's long-standing practice of supporting the community. DBRS Morningstar believes that the impact of this delay on CUI's 2021 and 2022 cash flow will be modest.

The Company’s financial performance in 2020 remained solid but was modestly weaker than 2019, largely reflecting the timing of settlements related to regulatory decisions. CUI's credit metrics were solid for 2020 and the last 12 months ended March 31, 2021. CUI's metrics 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%, 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 2021 and approximately $125 million due in 2022. CUI's liquidity remained strong at the end of Q1 2021 with approximately $1.09 billion in available credit facilities, cash, and equivalents. In response to the pandemic, CUI lowered its 2020 capital investment to preserve liquidity and provide financial flexibility. This reduction would have a modest impact on the rate base growth but would have no impact on the Company’s existing operations, system reliability, and integrity. Capital expenditures (capex) in 2021 will likely increase considerably from the 2020 level. CUI expects to finance its capex with internal cash flow and long-term 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.

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/373262.

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 (October 27, 2020; https://www.dbrsmorningstar.com/research/368939), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), 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 (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577