DBRS Confirms EPCOR Utilities at A (low), 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 rating reflects EUI’s low-business-risk diversified portfolio of regulated assets. These assets (electric transmission and distribution and water assets) continue to provide stability to EUI’s financial and credit profile. EUI’s 29% economic interest in Capital Power also provides additional cash flow needed to fund growth in its core business. DBRS expects that over the medium term the Company’s core assets will contribute approximately 70% to 90% of its cash flow as EUI’s equity interest in Capital Power declines.

The regulatory environment in Alberta remains supportive for EUI’s core businesses. It is expected that EUI will continue to foster strong relationships with its key regulators, particularly in new regulatory jurisdictions such as the Southwest United States. The recent acquisition of Arizona American Water and New Mexico American Water by EUI for US$470 million remains in line with the Company’s stated strategy of pursuing development of transmission infrastructure, water and waste-water infrastructure for municipalities and acquisition of water and waste-water utilities in Alberta and the United States. DBRS expects the Company to continue to expand in a disciplined manner over the next few years, as it pursues regulated and long-term contracted investment opportunities.

DBRS estimates that capital expenditure excluding acquisitions for 2012 will be in the range of $400 million to $500 million, to be allocated primarily to sustaining and maintaining existing infrastructure and construction of the Heartland Transmission project (a joint venture with AltaLink, L.P., estimated at a cost of $582 million to $610 million). DBRS expects that EUI will continue to generate a modest free cash flow deficit in the medium term, which will be funded with debt and the continued sell-down of its economic interest in Capital Power in such a way that its debt-to-capital ratio remains 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 increases to the new range of 2.5 times (x) to 3.0x. These ratio ranges are commensurate with EUI’s A (low) rating.

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

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