DBRS Confirms EPCOR Utilities at A (low) and R-1 (low)

DBRS has today confirmed the ratings of EPCOR Utilities Inc.’s (EUI or the Company) Commercial Paper and Senior Unsecured Debentures at R-1 (low) and A (low), respectively, with Stable trends. The ratings reflect EUI’s strong and stable cash flow generated from its portfolio of regulated assets. These assets (predominantly electric transmission and distribution and water assets) are expected to contribute approximately 90% of its EBITDA going forward and should provide a very stable financial base, being either regulated or contracted on a long-term basis. Furthermore, EUI’s financial profile and credit metrics remain strong for an entity with declining business risk following the partial divestiture of its power generation business in 2009. Though the metrics have declined to levels more characteristic of a traditional utility, they remain consistent with the current credit rating.

In 2009, EUI proceeded with the creation of Capital Power Corporation (CPC), whose affiliate, Capital Power L.P. (Capital Power, rated BBB with a Stable trend), acquired all of EUI’s power generating assets and related operations. After the $500 million initial public offering of 100% of CPC’s common equity, EUI holds approximately 72.2% of the generation business through its holding of exchangeable units of Capital Power. However, the Company does not control Capital Power, with only a minority board representation and voting interest capped at 49%. EUI retained all of its approximately $2.0 billion in debt, and created $896 million in back-to-back loans to Capital Power (the Loans Receivable) back in July 2009. The amount outstanding on the loans as of June 30, 2010 was $613 million.

The Loans Receivable expose EUI to Capital Power’s credit risk for both interest and principal payments, as these payments are expected to contribute to EUI’s ability to service and retire a portion of its own debt. The 2011 maturity of $233 million reflect principal repayments related to the Loans Receivable from Capital Power. DBRS remains comfortable with the BBB-rated Capital Power’s ability to fulfill its obligations to EUI, given its reasonable credit profile and access to committed bank facilities totalling $1.2 billion.

Following the Capital Power transaction, going forward EUI’s growth strategy is to focus on investment opportunities in essential infrastructure in the water, wastewater and electricity sectors. The degree and pace of expansion will depend largely on EUI’s ability to sell additional interests in its retained interest in Capital Power. DBRS expects the Company to gradually monetize its interest over the next five years in alignment with its growth strategy. DBRS notes that the market conditions and timing of disposition may not always be favourable.

DBRS expects that EUI will continue to generate a modest free cash flow deficit in the medium term, which will be funded with debt as it grows its utility business and pays out dividends to the City of Edmonton. The Company remains committed to paying out roughly 60% of its net income in dividends. However, the debt-to-capital ratio is expected to remain in the low to mid-40% range, while cash flow-to-total debt remains in the low-to-mid-teens and EBITDA-to-interest coverage in the new range of 2.5 times to 3.0 times.

The Company’s credit facilities were reduced in 2009 to a committed amount of $500 million to reflect its lower cash requirements as a result of the Capital Power transaction, a level DBRS views as adequate for the new business platform.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.

This is a Corporate rating.