DBRS Confirms EPCOR Utilities Inc. at A (low), Stable

DBRS has today confirmed the Issuer Rating and the ratings of the Senior Unsecured Debentures and Commercial Paper of EPCOR Utilities Inc. (EUI or the Company) at A (low), A (low) and R-1 (low), respectively, all with Stable trends. The rating confirmations are based on EUI’s relatively low-business-risk portfolio of regulated assets (electric transmission and distribution and water assets) and solid balance sheet strength.

The Company’s business risk profile is viewed as strong, as a majority of earnings are generated by its diversified portfolio of regulated assets, which operates under relatively stable, albeit evolving, regulatory frameworks. In September 2012, the Alberta Utilities Commission approved the transition to performance-based regulation (PBR) from the current cost-of-service framework for distribution utilities in Alberta. DBRS expects that the new PBR framework will not have a material impact on the credit profile of EUI; however, the uncertainty regarding the capital tracker mechanism for the recovery of certain capital expenditures (capex) could potentially increase regulatory risk. 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.

EUI’s financial profile has remained reasonable, supported by strong and growing earnings and cash flow. Over the medium term, DBRS expects that EUI will continue to generate a moderate free cash flow deficit due to the high level of capex. 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; however, the Company recorded a $124 million impairment on its investment in Capital Power in 2012 as the recoverable amount of its investment was lower than the carrying amount. In addition, in January 2012, EUI acquired Arizona American Water and New Mexico American Water (the Acquisitions) from American Water Works Company, Inc. (American Water) for cash considerations of US$459 million and the assumption of US$9 million in debt. 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. The free cash flow deficit and the Acquisitions in 2012 resulted in a moderate increase in the Company’s leverage, although EUI’s key credit metrics remained in line with its current rating category.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.