Canadian Utilities $42 – Toronto symbol CU

CANADIAN UTILITIES LTD. (Toronto symbols CU $42 (Class A) and CU.X $42 (Class B); Income Portfolio, Utilities sector; Shares outstanding: 125.4 million; Market cap: $5.3 billion; SI Rating: Above average) is a leading supplier of natural gas and electricity in Alberta. It has 970,000 gas customers, and 216,000 electricity customers. It also operates power plants in other parts of Canada, as well as in the UK and Australia. ATCO Ltd. controls about 74% of the company’s class B voting common shares. In the past few years, Canadian Utilities has sold many of its unregulated operations. That hurts its growth prospects, but also limits its overall risk. It now gets about half of its revenue and income from regulated operations. In 2006, Canadian Utilities considered selling or spinning off its unregulated gas processing and storage business. However, Ottawa’s plan to tax income trusts, as well as falling gas prices, scared off buyers. The company will hang on to these assets for now. In 2006, Canadian Utilities earned $2.56 a share, up 23.1% from $2.08 in 2005. Most of the gain came from higher profits at its Alberta power plants, due to higher rates and demand. Better earnings from its gas storage business also contributed to the improved profits. Revenue fell 4.0%, to $2.4 billion from $2.5 billion, as lower gas prices hurt revenues at its gas distribution operations. The company will spend around $5.80 a share on capital upgrades and maintenance in 2007, up 29.5% from $4.48 in 2006. That’s more that the $5.15 a share in cash flow Canadian Utilities will probably generate in 2007. But it has $6.37 a share in cash, so it won’t have to increase its long-term debt, which is a high 1.04 times equity. The company has raised its dividend each year since it became it became a public company in 1972. The current rate of $1.22 yields 2.9%. It paid a special dividend of $0.25 in 2006, and could pay out more of its excess cash this year. The stock now trades at 17.4 times the $2.42 a share it should earn in 2007. Canadian Utilities is a buy. The more liquid class ‘A’ non-voting shares are the better choice.