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Canadian Utilities Ltd. $39 – Toronto symbol CU.NV

CANADIAN UTILITIES LTD. $39 (Toronto symbol CU.NV; SI Rating: Above average) supplies electricity and natural gas to over 1 million customers, primarily in Alberta. It also invests in overseas gas and electricity assets.

In the three months ended December 31, 2005, earnings fell to $0.69 a share from $0.71 a year earlier, mostly due to higher gas franchise fees paid to municipalities. Higher electricity rates helped push revenue up 6.8%, to $680.3 million from $637.0 million.

The company generated cash flow of $5.17 a share in 2005, up 22.2% from $4.23 in 2004. However, that failed to fully cover its capital costs of $4.13 a share, and its $1.10 dividend.

Consequently, Canadian Utilities’ long-term debt grew about 3% in 2005, and is a high 1.0 times equity. However, these new loans replaced older debt with higher interest rates. That should cut the company’s interest costs, and give it more cash for dividends. In fact, it just raised its annual dividend rate to $1.14 a share, for a yield of 2.9%.

Right now, Canadian Utilities’ regulated businesses supply roughly half of its revenue, but just a third of its income. That’s why the company will probably close its regulated power plants once their existing power supply contracts expire. It will hang on to its regulated gas operations, which helps cut its overall risk.

The stock hit $46 in January, but has moved down lately as warmer than usual winter weather in Alberta has hurt gas sales and prices. It now trades at 18.3 times the $2.13 a share it will probably earn in 2006.

Canadian Utilities is a buy.

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