DBRS Comments on the City of Edmonton’s Approval to Transfer Drainage to EPCOR Utilities Inc.

DBRS Limited (DBRS) today notes that, on April 12, 2017, the City of Edmonton (the City) approved the transfer of its Drainage Utility Services (Drainage) to EPCOR Utilities Inc. (EUI or the Company; rated A (low) with a Stable trend by DBRS). EUI is 100% owned by the City. The transfer is expected to be completed on September 1, 2017, subject to finalization of the transfer terms.

DBRS views the transfer as neutral to EUI’s business risk profile as Drainage is fully regulated by the City on a cost-of-service (COS) basis. While the regulation for Drainage is not as robust as the City’s performance-based regulation (PBR) for the Company’s regulated water and wastewater operations in Edmonton, EUI plans to transition Drainage to PBR in 2022. DBRS notes that Drainage’s COS plan currently targets a debt-to-net assets ratio between 50% and 70% rather than a traditional deemed equity and allowed return on equity approach; however, DBRS continues to view regulation by the City as reasonable and supportive of the current ratings.

DBRS expects the transfer to weaken EUI’s financial risk profile. Drainage currently has non-contributed capital assets of approximately $1.1 billion and total debt of around $609 million. As part of the transfer, EUI will assume the outstanding debt as well as commit to an overall $1.7 billon ten-year capital expenditures (capex) program. The Company has also agreed to (1) limit rate increases for Drainage to no more than 3% annually until 2022 and (2) increase its annual distribution to the City by $20 million. Drainage is projected to provide additional EBIT and cash flow from operations of approximately $65 million in 2017. Pro forma the transfer, DBRS expects EUI’s key credit metrics to weaken, but remain commensurate with the current ratings. Going forward, DBRS expects the Company to manage its debt and capex program to maintain its key credit metrics in line with the current rating category.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on dbrs.com under Methodologies.

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