DBRS Morningstar Comments on Canadian Utilities Limited Agreeing to Acquire a Portfolio of Wind and Solar Assets and Projects in Alberta and Ontario

DBRS Limited (DBRS Morningstar) notes that Canadian Utilities Limited (CUL; rated “A” with a Stable trend by DBRS Morningstar) announced yesterday that it entered into definitive agreements with Suncor Energy Inc. (rated A (low) with a Stable trend by DBRS Morningstar) to acquire a portfolio of wind and solar assets and projects in Alberta and Ontario for a purchase price of $730 million (the Acquisition), subject to adjustments at closing. The Acquisition is expected to close in the first quarter of 2023, subject to regulatory approvals.

Assets (all in megawatt (MW) and net to CUL) in the Acquisition include the following:

Operating Assets at Closing
-- Forty Mile Wind Phase I has net capacity of 202 MW (operations expected to commence by the end of 2022). Advanced negotiation is under way for the contracting of approximately 75%. CUL will own 100%.
-- Adelaide Wind has net capacity of 30 MW and is fully contracted. CUL will own 75%.
-- Chin Chute Wind and Magrath Wind have net capacity of 10 MW each, and both are on merchant. CUL will own 33%, which means CUL will have no control and its investments in these two assets will likely be accounted as equity-accounted investments.

Near-Term Development Projects
-- Forty Mile Wind Phase I Upgrading is expected to have net capacity of 24 MW. CUL will own 100%.
-- Forty Mile Solar is expected to have net capacity of 220 MW. CUL will own 100%.
-- Forty Mile Wind Phase I Upgrading is expected to have net capacity of 200 MW. CUL will own 100%.

Midstage Development Projects
-- Craig Lake Wind is expected to have net capacity of 246 MW. CUL will own 100%.
-- Kitscoty Wind is expected to have net capacity of 174 MW. CUL will own 100%.

Early-Stage Development Projects
-- Opportunities for four solar projects are expected to have net capacity of 490 MW. CUL will own 100%.
-- Opportunities for one wind/solar project is expected to have net capacity of 200 MW. CUL will own 100%.

DBRS Morningstar has reviewed the immediate and future impact of the Acquisition on CUL’s business risk profile. DBRS Morningstar has also reviewed CUL’s potential financing strategy for the acquisition and for future project developments on its financial risk profile. DBRS Morningstar’s opinion is as follows.

With respect to CUL’s business risk profile, there would be no material immediate impact following the closing of the Acquisition as most CUL’s consolidated cash flows would still be from its stable, low-risk regulated utilities in Canada and Australia. DBRS Morningstar expects CUL’s regulated utility operations to continue to generate over 90% of CUL’s consolidated cash flow in the medium term post-Acquisition, as the size of the Acquisition is relatively modest compared with CUL’s total assets of approximately $21.4 billion as at June 30, 2022. However, after the Acquisition, should CUL take on an aggressive expansion in renewable generation assets to a degree that future cash flow (or EBITDA) contributed to CUL from its regulated utilities declines to significantly below 90% on a sustained basis, its rating could be affected. DBRS Morningstar is of the view that renewable generation assets, even when fully contracted, would entail higher risk than regulated utility assets.

With respect to CUL’s financial risk profile, DBRS Morningstar thinks the potential financing of the Acquisition would have no immediate material impact on its consolidated credit ratios. Following the closing of the Acquisition, DBRS Morningstar expects CUL to reasonably finance its future renewable generation projects in a manner so that its current credit metrics would remain relatively stable and solid within the required range to maintain its “A” rating, as indicated in DBRS Morningstar’s “Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry” (September 2022). A material deterioration of CUL’s consolidated credit metrics, notwithstanding its business risk profile, could have a negative impact on CUL’s ratings. DBRS Morningstar believes that CUL has sufficient liquidity to finance the Acquisition.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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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