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

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debentures rating of EPCOR Utilities Inc. (EUI or the Company) at A (low) and the Commercial Paper rating at R-1 (low), all with Stable trends. The ratings are based on the stable, regulated operations of the Company (electric distribution and transmission, and water and waste-water) and its reasonable financial risk profile.

EUI’s business risk profile is supported by the Company’s regulated electricity transmission and distribution, and water and waste-water operations in Canada, and the reasonable regulatory environment in Alberta. The Alberta Utilities Commission issued a decision on EPCOR Distribution & Transmission Inc.’s 2013 capital tracker application in December 2013, approving most of the applied-for amount ($4.87 million of $5.03 million). This decision is viewed as positive, as it reduces the uncertainty regarding the recovery of capital expenditures (capex) for the Company under the performance-based regulation framework.

The current strategy of EUI is to fund its U.S. regulated water and waste-water expansion through the continued sell down of its Capital Power L.P. (Capital Power; rated BBB) investment. Although the acquired utilities in New Mexico and Arizona are considered to have lower business risk than Capital Power, overall this strategy has not had a material impact on the Company’s business risk profile. This is due to the more challenging, albeit improving, regulatory environment in these states compared to EUI’s primary franchise of Alberta. The use of historical test years in these states’ rate-making process could potentially increase regulatory lag and negatively affect the timing of capex recovery.

EUI’s consolidated financial risk profile is supportive of the current rating category, with all key credit metrics in the “A” rating range. The Company’s key ratios going forward will continue to benefit from the increase in cash flow resulting from the acquisition of EPCOR Water Arizona Inc. and EPCOR Water New Mexico Inc. in late 2012. However, EUI is expected to continue generating free cash flow deficits for the medium term as it invests in maintaining the reliability of its infrastructure and expanding its system. DBRS expects these free cash flow deficits to remain manageable and be financed in a prudent manner in order for the Company to maintain its debt-to-capital ratio in line with the regulatory capital structure.

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 methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.