CANADIAN UTILITIES LTD. – Toronto symbols CU $68 and CU.X $68

CANADIAN UTILITIES LTD. (Toronto symbols CU [class A non-voting] $68 and CU.X [class B voting] $68; Income Portfolio, Utilities sector; Shares outstanding: 128.1 million; Market cap: $8.7 billion; Price-to-sales ratio: 2.7; Dividend yield: 2.6%; TSINetwork Rating: Above Average; www.canadianutilities.com) distributes electricity and natural gas in Alberta. It also operates 18 power plants in Canada, Australia and the U.K. ATCO Ltd. (see page 2) owns 52.8% of Canadian Utilities.

The company’s power plants supply around 60% of its earnings, followed by gas distribution (30%) and other businesses (10%). It gets 90% of its earnings from Canada.

Canadian Utilities’ revenue rose 15.6%, from $2.4 billion in 2007 to $2.8 billion in 2008. However, lower power rates for its unregulated plants in Alberta cut its revenue by 7.0%, to $2.6 billion, in 2009. Revenue rebounded by 4.5% in 2010, to $2.7 billion, after it started up a new power plant in Australia.

In July 2011, Canadian Utilities paid $1.1 billion for Western Australia Gas Networks, which distributes natural gas to over650,000 customers in the city of Perth. This purchase helped push up the company’s 2011 revenue by 11.1%, to $3.0 billion.

Earnings rose 21.6%, from $384 million, or $3.06 a share, in 2007 to $467 million, or $3.71 a share, in 2009. Earnings fell to $432 million, or $3.21 a share, in 2010, but recovered to $496 million, or $3.65 a share, in 2011.

Promising growth projects on the way

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 $4.9 billion as of September 30, 2012.

That debt seems high at 56% of Canadian Utilities’ market cap. However, high debt levels are common for utilities. That’s because they must invest large sums to maintain and expand their operations, but they generate plenty of steady cash flows to pay the interest. Regulated operations supply 75% of its earnings, which cuts its risk.

Canadian Utilities is also investing in projects that will make Alberta’s electricity grid more reliable. For example, it is spending $735 million to build 355 kilometres of new transmission lines and substations in the province’s southeast. The company expects to complete this project in mid-2013.

As well, it recently received regulatory approval for its plan to build a 500-kilometre powertransmission line from northeast of Edmonton to southeastern Alberta. This project will cost $1.6 billion and should begin operating in 2015.

The company will probably earn $3.98 a share in 2012. The stock trades at 17.1 times that estimate.

New reinvestment plan adds appeal

Canadian Utilities has raised its dividend every year since 1972. The current annual rate of $1.77 a share yields 2.6%. As well, it now lets investors use their dividends to buy new class A shares at a 2% discount to the market price.

The company’s class A non-voting shares are more liquid than the class B voting shares.

Canadian Utilities A is a buy.

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