28 October 2014 Americas/Canada Equity Research Multi Utilities Canadian Utilities Limited (CU.TO) Rating OUTPERFORM* Price (27 Oct 14, C$) 40.00 INITIATION Target price (C$) 46.00¹ 52-week price range 41.27 - 35.12 Market cap. (C$ m) 10,510.64 Core Canadian Growth Supplemented by Enterprise value (C$ m) 17,434.67 *Stock ratings are relative to the coverage universe in each Selected Geographic Expansion analyst's or each team's respective sector. ¹Target price is for 12 months. ■ All About Alberta: We initiate coverage of Canadian Utilities Limited (CU) Research Analysts with an Outperform rating and a C$46 target price. The recent growth in Paul Tan CU's financials is driven largely from its organic utility segment growth owing 416 352 4593 [email protected] primarily to the continued natural resource development in the Province of Andrew M. Kuske Alberta. CU should continue to benefit from the continued growth of this 416 352 4561 natural resource for the foreseeable future. Another positive outcome has [email protected] been the greater proportion of earnings coming from a more stable source. We believe this organic growth will translate into continued earnings and dividend growth. ■ Geographic Diversification: CU wants to duplicate its success in Alberta to other markets in the globe that have similar characteristics as the Canadian province. The company has targeted Australia and Mexico to supplement its Alberta base growth. We believe with CU can benefit from the natural resources growth in Western Australia (iron ore and LNG) and the planned National Infrastructure Program being implemented in Mexico. ■ Investment Thesis: CU is benefitting from the ongoing growth of the Alberta oilsands with large organic growth in its Alberta base regulated utilities segment. We believe the growth in Alberta will be supplemented by organic growth in Australia and Mexico. ■ Valuation: Our C$46 target price is calculated using multiple valuation approaches, largely from a targeted dividend yield of 2.50% (2015e), in-line with the 2.50% Canadian 10-year bond yield forecast and a 17.7x P/E multiple on 2016e. Share price performance Financial and valuation metrics Daily Oct 28, 2013 - Oct 27, 2014, 10/28/13 = C$37.99 Year 12/13A 12/14E 12/15E 12/16E 41 EPS (CS adj.) (C$) 2.21 2.13 2.45 2.60 39 Prev. EPS (C$) — — — — 37 P/E (x) 18.1 18.8 16.3 15.4 35 P/E rel. (%) 104.3 124.9 122.9 129.7 33 Revenue (C$ m) 3,381.0 3,772.6 3,969.6 4,205.1 Oct-13 Feb-14 Jun-14 EBITDA (C$ m) 1,544.0 1,713.2 1,883.8 2,039.9 Price Indexed Price Relative OCFPS (C$) 2.73 2.41 2.34 2.09 On 10/27/14 the S&P/TSX Composite closed at 14469. P/OCF (x) 13.1 16.6 17.1 19.2 EV/EBITDA (current) 11.0 9.9 9.0 8.3 Net debt (C$ m) 5,795 6,924 7,630 7,844 ROIC (%) 7.28 7.15 6.94 6.98 Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 262.77 IC (current, C$ m) 11,189.00 2013A 1.40 0.51 0.43 0.57 BV/share (Next Qtr., C$) 15.8 EV/IC (x) 1.4 2014E 0.71 0.32 0.45 0.65 Net debt (Next Qtr., C$ m) 6,743.1 Dividend (current, C$) 1.1 Net debt/tot eq (Next Qtr., %) 123.2 Dividend yield (%) 0.67 2015E 0.76 0.50 0.46 0.73 Source: Company data, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 28 October 2014 Canadian Utilities Limited CU.TO Price (27 Oct 14): C$40.00, Rating: OUTPERFORM, Target Price: C$46.00 Income statement (C$ m) 12/13A 12/14E 12/15E 12/16E Per share data 12/13A 12/14E 12/15E 12/16E Revenue (C$ m) 3,381.0 3,772.6 3,969.6 4,205.1 No. of shares (wtd avg) 259 263 266 269 EBITDA 1,544 1,713 1,884 2,040 CS adj. EPS (C$) 2.21 2.13 2.45 2.60 Depr. & amort. (478) (519) (583) (639) Prev. EPS (C$) — — — — EBIT (C$) 1,066 1,194 1,300 1,401 Dividend (C$) 0.97 1.07 1.17 1.28 Net interest exp. (273) (308) (345) (370) Dividend payout ratio 43.97 50.19 47.77 49.31 Associates — — — — Free cash flow per share (5.68) (4.98) (5.77) (4.66) Other adj, — — — — (C$) PBT (C$) 793 886 955 1,031 Key ratios and 12/13A 12/14E 12/15E 12/16E Income taxes (187) (220) (239) (258) valuation Profit after tax 606 666 716 773 Growth(%) Minorities — — — — Sales 7.7 11.6 5.2 5.9 Preferred dividends (64) (65) (65) (74) EBIT 7.4 12.0 8.9 7.7 Associates & other (98) (171) (130) (148) Net profit 10.6 (2.0) 16.2 7.3 Net profit (C$) 572 561 651 699 EPS (45.4) (3.3) 14.9 6.0 Other NPAT adjustments (30) 40 — — Margins (%) Reported net income 542 601 651 699 EBITDA margin 45.7 45.4 47.5 48.5 EBIT margin 31.5 31.6 32.8 33.3 Cash flow (C$) 12/13A 12/14E 12/15E 12/16E Pretax margin 23.5 23.5 24.1 24.5 EBIT 1,066 1,194 1,300 1,401 Net margin 16.9 14.9 16.4 16.6 Net interest 291 318 352 378 Valuation metrics (x) Cash taxes paid 75 89 96 — EV/sales 4.8 4.6 4.6 4.4 Change in working capital 114 (40) — — EV/EBITDA 11.0 9.9 9.0 8.3 Other cash & non-cash items (775) (862) (1,062) (1,143) EV/EBIT 15.3 14.6 13.9 13.1 Cash flow from operations 771 699 687 636 P/E 18.1 18.8 16.3 15.4 CAPEX (2,245) (2,009) (2,222) (1,892) P/B 2.6 2.4 2.2 1.9 Free cash flow to the firm (1,474) (1,310) (1,535) (1,256) Asset turnover 0.22 0.23 0.22 0.21 Acquisitions — — — — ROE analysis (%) Divestments 2 5 — — ROE stated-return on 14.9 14.5 14.1 13.4 Other investment/(outflows) (175) (75) — — equityROIC 7.3 7.1 6.9 7.0 Cash flow from investments (2,418) (2,079) (2,222) (1,892) Interest burden 0.74 0.74 0.73 0.74 Net share issue/(repurchase) 3 59 124 137 Tax rate 23.6 24.8 25.0 25.0 Dividends paid (180) (228) (250) (279) Financial leverage 1.2 1.3 1.2 1.2 Issuance (retirement) of debt 879 955 650 — Credit ratios (%) Other 401 (536) 306 734 Net debt/equity 107.4 123.0 118.9 109.0 Cash flow from financing 1,103 249 829 1,042 Net debt/EBITDA 3.8 4.0 4.1 3.8 activitiesEffect of exchange rates (6) 2 — — Interest coverage ratio 3.9 3.9 3.8 3.8 Changes in Net Cash/Debt (550) (1,129) (706) (214) Net debt at start 5,245 5,795 6,924 7,630 Quarterly data 12/13A 12/14E 12/15E 12/16E Change in net debt 550 1,129 706 214 EPS for Q1 1.40 0.71 0.76 0.82 Net debt at end 5,795 6,924 7,630 7,844 EPS for Q2 0.51 0.32 0.50 0.54 EPS for Q3 0.43 0.45 0.46 0.48 Balance sheet (C$ m) 12/13A 12/14E 12/15E 12/16E EPS for Q4 0.57 0.65 0.73 0.76 Assets Cash and cash equivalents 498 372 316 552 Accounts receivable 485 411 411 411 Source: Company data, Credit Suisse estimates. Inventory 90 94 94 94 Other current assets 32 65 65 65 Total current assets 1,105 942 886 1,122 Total fixed assets 13,224 14,836 16,474 17,727 Daily Oct 28, 2013 - Oct 27, 2014, 10/28/13 = C$37.99 Intangible assets and goodwill 370 394 394 394 Investment securities 190 194 194 194 41 Other assets 162 177 177 177 39 Total assets 15,051 16,543 18,125 19,614 37 Liabilities Accounts payable 777 704 704 704 35 Short-term debt 2 590 590 590 33 Other short term liabilities 245 500 500 500 Oct-13 Feb-14 Jun-14 Total current liabilities 1,024 1,794 1,794 1,794 Price Indexed Price Relative Long-term debt 6,114 6,235 6,885 7,335 Other liabilities 2,519 2,884 3,027 3,285 On 10/21/14 the S&P/TSX Composite closed at 14547.71 Total liabilities 9,657 10,913 11,706 12,414 Shareholders' equity 5,394 5,629 6,419 7,200 Minority interest — — — — Total equity & liabilities 15,051 16,543 18,125 19,614 Net debt (C$ m) 5,795 6,924 7,630 7,844 Canadian Utilities Limited (CU.TO) 2 28 October 2014 Canadian Utilities—Key charts Exhibit 1: Large utility segment yearly capital Exhibit 2: A long track record of dividend per share expenditures (C$ in millions) growth (C$) $2,500 $1.40 1.28 2,142 2,178 2,000 2,000 $1.20 1.17 $2,000 1.07 $1.00 0.97 0.885 1,500 0.805 $1,500 0.755 1,316 $0.80 0.705 0.665 0.625 0.575 0.55 0.53 $0.60 0.51 0.49 0.47 $1,000 853 0.45 776 788 $0.40 $500 $0.20 $0.00 $0 2000 2014 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 2014 2015 2016 2001 2015e 2016e Note: 2014-2016 company guidance.