DBRS Updates Its Report on EPCOR Utilities Inc.

DBRS has today updated its report on EPCOR Utilities Inc. (EUI or the Company). The credit quality of EUI is based on the reasonable regulatory environment in Alberta and 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. DBRS expects that over the medium term, the Company’s regulated core assets will contribute approximately 70% to 90% of its cash flow as EUI’s equity interest in Capital Power L.P. (Capital Power; rated BBB) declines.

For the six months ended June 30, 2012 (H1 2012), EUI generated a free cash flow deficit of approximately $76 million due to higher capital expenditures (capex) and a high dividend payout. The deficits were funded by debt and net proceeds from the sale of its economic interest in Capital Power. DBRS expects that EUI will continue to generate a modest free cash flow deficit in the medium term due to the high level of capex to maintain the existing infrastructure and to construct the Heartland Transmission Project (a joint venture with AltaLink, L.P. (rated “A”), estimated at a gross cost of approximately $430 million). The deficits are viewed as manageable by DBRS and are expected to be funded with debt and the continued sell down of the Company’s economic interest in Capital Power.

EUI’s acquisition of Arizona American Water and New Mexico American Water (the Acquisitions) from American Water Works Company, Inc. (American Water) for cash considerations of USD 458 million and the assumption of USD 9 million in debt in January 2012 remains in line with the Company’s stated strategy of pursuing acquisitions of water and waste-water utilities in Alberta and the Southwest U.S. However, DBRS notes that the return on equity for the Acquisitions under American Water’s ownership was challenging. It remains to be seen whether EUI can successfully generate adequate returns for its U.S. businesses post-acquisition.

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.