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

DBRS Limited (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 underpinned by EUI’s stable regulated electricity distribution and transmission, and water and waste-water businesses along with its reasonable financial risk profile.

Regulation in Alberta continues to be supportive of EUI’s current ratings, but recent unfavourable decisions by the Alberta Utilities Commission (AUC) has led to slight deteriorations in the quality of the regulatory regime. In March 2015, the AUC issued its decision on the 2013 Generic Cost of Capital, lowering the 2013 to 2015 approved return on equity to 8.30% (8.75% previously) and decreasing the equity thickness by 1% to 40% and 36%, respectively, for EUI’s distribution and transmission segments. During the distribution segment’s current Performance-Based Regulation term, the decision will not have any impact on its revenue (set using 2013 interim rates) except for the portion that is funded through capital trackers. However, the transmission segment will see moderately lower income during this period. Additionally, the AUC also issued its decision on EUI’s 2013 to 2015 capital tracker application in January 2015. The decision was mostly favourable as over 90% of the applied-for capital was approved. However, as a result of the Utility Asset Disposition (UAD), the AUC ruled that the retirement of existing meters to be replaced by smart meters would be to the account of the shareholder, resulting in stranded cost of approximately $10 to $12 million. The Alberta utilities are currently appealing the UAD and a decision from the Court of Appeal is expected by the end of the year. As noted in the DBRS commentary, DBRS Comments on Quality of Regulatory Regimes in Alberta, dated July 23, 2015, a potential unfavourable UAD court decision alone would not affect EUI’s ratings. DBRS will assess the magnitude of the stranded cost as a result of an UAD event on a case-by-case basis when such an event materializes.

EUI’s financial risk profile continues to be reasonable for the current rating category, with key credit metrics in line with the current rating category. Due to the ongoing high capital expenditures (around $400 to $500 million for 2015), the Company is expected to continue generating free cash flow deficits for the medium term. DBRS notes that in April 2015, EUI sold an additional 9% of its interest in Capital Power L.P. (rated BBB by DBRS) for gross proceeds of approximately $225 million, which is expected to be sufficient to fund any free cash flow deficits in 2015. Going forward, DBRS expects free cash flow deficits to remain manageable and to 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 methodology are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015), which can be found on our website under Methodologies.

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