S&P Downgrades CU and CIU

Standard & Poor’s has announced:

  • •We are lowering our long-term corporate credit and senior unsecured debt ratings on Calgary, Alta.-based ATCO Ltd., and its core subsidiaries Canadian Utilities Ltd. (CU Ltd.) and CU Inc., to ‘A-‘ from ‘A’.
  • •As well, we are downgrading the company’s preferred shares to ‘BBB’ from ‘BBB+’.
  • •Because we consider CU Ltd. and CU Inc. core to ATCO under our group rating methodology, we have equalized the ratings on the subsidiaries with those on the parent.
  • •The stable outlook reflects our view that the company’s credit metrics are forecast to be within the thresholds for the ‘A-‘ rating.

The downgrade reflects credit metrics that we forecast will continue to be weak in the medium term. Historically, ATCO’s credit metrics have been quite robust with funds from operations (FFO)-to-debt in the high teens. Over the past few years, these metrics have declined as the company embarked on a significant capital program. While the large capital program is abating, we forecast continued weakness as ATCO embarks on further capital spending. Overall, we believe that management will continue to operate the company in line with its conservative corporate strategy and consistent track record. However, we continue to forecast credit metrics at the mid-to-lower end of the significant financial risk category, with FFO-to-debt of 13%-14% for both 2017 and 2018. A significant contributor to the stressed credit metrics is construction of the Edmonton to Fort McMurray transmission line, which will continue to pressure credit metrics in the medium term. In addition, a continued weak Alberta operating environment is affecting metrics. While the conversion to a capacity market may present some opportunities for the company, the ultimate impact of these changes is unknown. Accordingly, we do not believe there is a continued rationale for the one-notch uplift that we historically linked to strong credit metrics.

The stable outlook on ATCO continues to reflect S&P Global Ratings’ view of a stable and consistent cash flow from predominately regulated utilities as well as good operating performance. Although credit metrics will be weak during the outlook period with AFFO-to-debt forecast of about 13% in 2017, we believe that once the Edmonton to Fort McMurray transmission line is finished in 2019, credit metrics will improve to about 15%.

All affected instruments were downgraded from P-2(high) to P-2.

Affected instruments are:



Update, 2017-7-25: DBRS confirms at Pfd-2(high):

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.

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