DBRS Morningstar Confirms Ratings of Canadian Utilities Limited at “A,” R-1 (low), and Pfd-2 (high) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed both the Issuer Rating and the Unsecured Debentures rating of Canadian Utilities Limited (CUL or the Holdco or the Company) at “A” as well its Commercial Paper rating at R-1 (low) and Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable. The rating of the Cumulative Preferred Shares is a notch higher than the standard mapping with the Issuer Rating, which reflects very low debt and strong liquidity at the Holdco level.

The confirmations reflect (1) the Holdco’s solid consolidated and nonconsolidated financial profile, strong liquidity, and low leverage; (2) the strong and stable 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) the operational and financial resiliency in coping with the Coronavirus Disease (COVID-19) pandemic at its regulated utility operations, which account for most of CUL’s consolidated cash flow. The Holdco’s ratings incorporate the subordination of its debt to the debt issued by CUI as well as its regulated natural gas distribution operations in Australia.

CUL’s ratings are largely based on CUI ratings, taking into account structural subordination and low leverage at the Holdco level. CUI is 100% owned by the Holdco. CUI accounted for approximately 88% of CUL’s segment adjusted earnings in 2020 and approximately 90% of consolidated cash flow. CUI is one of the largest and most diversified regulated utilities in Canada, with a rate base of approximately $12.8 billion as at mid-year 2020. On July 22, 2021, DBRS Morningstar confirmed the A (high) rating of CUI. Please see DBRS Morningstar’s report on CUI dated July 27, 2021.

CUL’s other operations are not material to its overall cash flow. They largely include (1) regulated natural gas distribution in Australia (5% earnings in 2020) and (2) energy infrastructure including nonregulated generations in Alberta, Australia, and Mexico (3% of earnings in 2020). In addition, CUL owns a 50% interest in LUMA Energy, LLC (LUMA Energy), which was selected by the Puerto Rico P3A to transform, modernize, and operate Puerto Rico’s electricity transmission and distribution system over a term of 15 years until 2036. DBRS Morningstar considers LUMA Energy a quasiregulated operation and is of the view that this is credit positive for CUL as the LUMA Energy operation will provide CUL with stable cash flow without additional debt at the Holdco. In addition, the acquisition at the end of June 2021 of Pioneer Pipeline (a natural gas transmission pipeline running from Drayton Valley to the Wabamum area west of Edmonton) should improve regulated cash flow as the regulator approved the acquisition costs, which will increase the rate base.

CUL’s consolidated financial risk profile remained strong and relatively stable in H1 2021 despite the ongoing pandemic. The impact of the pandemic on CUL’s regulated operations has been modest as the Company continues to provide an essential service and operate critical infrastructure. A substantial portion of CUL’s operations, such as electricity transmission, natural gas distribution, and natural gas transmission, is exposed to very limited volume risk. The volume risk at the Canadian electricity distribution operation is modest. The Company has used a variety of mechanisms (rate minimum, contract minimum, fixed cost recovery) to limit its exposure to demand reductions from industrial and commercial customers. The volume risk associated with the natural gas distribution operation in Australia is significantly mitigated by the new five-year Access Arrangement effective January 2020, which includes rebasing of revenues for recovery of operating costs, approved capex, and forecast demand for volume.

The CUL’s liquidity was strong, with approximately $781 million in cash and equivalents on the balance sheet as at December 31, 2020, and approximately $900 million in available committed credit facilities as at June 30, 2021. CUL has only $200 million in long-term debentures at the Holdco level that will be due in November 2022. CUL’s nonconsolidated financial profile remained strong in 2020 and is expected to stay strong in 2021 and beyond, supported by low nonconsolidated leverage (under 10% adjusted for the debt portion of preferred shares) and a strong cash flow-to-nonconsolidated debt ratio of more than 600% and cash flow-interest coverage of more than 150 times in 2020. DBRS Morningstar expects these ratios to remain very strong on a long-term basis.

DBRS Morningstar does not expect to take positive rating action on CUL’s ratings because these are largely constrained by CUI’s ratings. However, the following factors, should they occur, could place pressure on CUL’s ratings: (1) a change in business mix that would reduce the cash flow contribution from CUI to CUL’s overall consolidated cash flow; (2) a material increase in consolidated and nonconsolidated leverage, (3) a substantial increase in nonregulated operations (which DBRS Morningstar deems unlikely, given the current business strategy), or (4) adverse changes in regulation in Alberta that negatively affect CUI’s ratings.

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

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.

DBRS Morningstar 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@dbrsmorningstar.com.

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

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