PrefBlog

DBRS has announced (on August 30):

DBRS Limited (DBRS Morningstar) downgraded the rating of the Cumulative Preferred Shares of Canadian Utilities Limited (CUL, the Holdco, or the Company) to Pfd-2 from Pfd-2 (high). DBRS Morningstar confirmed both the Issuer Rating and the Unsecured Debentures rating at “A,” and its Commercial Paper rating at R-1 (low). All trends are Stable.

The downgrade of the Cumulative Preferred Shares reflects DBRS Morningstar’s expectation that CUL could issue more debt in the future either through the long-term debt or the use of its credit facilities, such that the higher-than-standard mapping of Pfd-2 (high), which only applies in rare cases where an issuer has no or minimal debt and has no plan to issue debt in the future, is no longer appropriate. DBRS Morningstar expects CUL to maintain its financing flexibility at the Holdco level in the medium term. The standard mapping of the preferred shares is Pdf-2.

The confirmations reflect (1) the Holdco’s solid consolidated and nonconsolidated cash flow credit metrics, strong liquidity, and reasonable leverage; (2) the strong 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) stable cash flow from its regulated natural gas distribution operations in Australia, ATCO Gas Australia Pty. Ltd. (AGA), and from LUMA Energy LLC (LUMA Energy). CUI, AGA, and LUMA Energy accounted for most of CUL’s consolidated cash flow in 2021 and are expected to contribute more than 90% of CUL’s cash flow in the medium terms. CUL’s ratings incorporate the structural subordination of its debt to the debt issued by CUI as well as AGA. LUMA Energy has no debt.

CUI’s ratings serve as a basis for CUL ratings. In addition, DBRS Morningstar also considers structural subordination and low leverage at the Holdco level. The Holdco holds a 100% interest in CUI. DBRS Morningstar estimates CUI accounted for more than 90% of CUL’s consolidated cash flow. CUI is one of the largest and most diversified regulated utilities in Canada, with a rate base of approximately $13.3 billion as at mid-year 2021. On July 25, 2022, DBRS Morningstar confirmed the A (high) rating of CUI. Please see DBRS Morningstar’s report on CUI dated August 2, 2022.
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DBRS Morningstar does not expect to take a positive rating action on CUL’s ratings because these are largely constrained by CUI’s ratings. However, the following factors could place pressure on CUL’s current ratings, should they occur: (1) adverse changes in regulation in Alberta that negatively affect CUI’s ratings; (2) a change in the business mix that would reduce the cash flow contribution from CUI to CUL’s overall consolidated cash flow; (3) a material increase in consolidated and/or nonconsolidated leverage; and (4) a substantial increase in nonregulated operations on a sustained basis.

Affected issues are CU.PR.C, CU.PR.D, CU.PR.E, CU.PR.F, CU.PR.G, CU.PR.H, CU.PR.I and CU.PR.J

This entry was posted on Saturday, September 10th, 2022 at 8:40 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.