CANADIAN UTILITIES LTD.(Toronto symbols CU [class A non-voting] $60 and CU.X [class B voting] $61; Income Portfolio, Utilities sector; Shares outstanding: 127.6 million; Market cap: $7.7 billion; Price-to-sales ratio: 2.6; Dividend yield: 2.7%; TSINetwork Rating: Above Average; www.canadianutilities.com) distributes electricity and natural gas in Alberta. It also operates 19 power plants in Canada, Australia and the U.K. ATCO Ltd. (see page 2) owns 52.7% of the company.
Canadian Utilities’ revenue fell 1.0%, from $2.43 billion in 2006 to $2.40 billion in 2007, but rose 15.6%, to $2.8 billion, in 2008. Lower power rates in Alberta cut revenue by 7.0%, to $2.6 billion, in 2009. However, revenue rose 2.8% in 2010, to $2.7 billion, because the company started up a new power plant in Australia. Earnings rose 37.6%, from $320.5 million, or $2.54 a share, in 2006 to $440.9 million, or $3.50 a share, in 2010.
Canadian Utilities continues to expand in Australia. In July 2011, it paid $1.1 billion for Western Australia Gas Networks, which distributes natural gas to over 620,000 customers in the city of Perth. The company’s Australian operations now supply 8% of its revenue and 10% of its earnings.
Debt is less of a concern for utilities
Canadian Utilities borrowed most of the funds it needed to buy Western Australia Gas Networks. That pushed up its long-term debt from $3.0 billion to $3.4 billion as of September 30, 2011.
That debt level seems high at 44% of Canadian Utilities’ market cap. However, high debt levels are common for utilities. That’s because they have to invest large sums to maintain and expand their operations, but they generate plenty of steady cash flows to pay the interest costs.
The company is also investing in other long-term growth projects. For example, it will spend $765 million on new power-transmission lines and substations in southeastern Alberta. Canadian Utilities expects to complete these upgrades in mid-2013.
As well, the company recently agreed to build a $1.6-billion transmission line between Edmonton and Calgary. However, the Alberta government recently suspended this project as part of a review of the province’s electricity system. The project had not yet received regulatory approval, so any potential loss to Canadian Utilities will be small.
The company will probably earn $3.88 a share in 2011. The stock trades at 15.5 times that estimate. Earnings in 2012 could reach $4.08 a share. The stock trades at 14.7 times that figure. The company has raised its dividend every year since 1972. The current dividend of $1.61 a share yields 2.7%.
Canadian Utilities is a buy. The more-liquid class A non-voting shares are the better choice.
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