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

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of EPCOR Utilities Inc. (EUI or the Company) at A (low) and the Company’s Commercial Paper rating at R-1 (low). All trends are Stable. The confirmation is based on the stability of the Company’s regulated utilities in the City of Edmonton (the City; 100% owner of EUI), as well as its strong key credit metrics.

EUI’s business risk profile remains supported by the reasonable regulation for its regulated businesses. DBRS continues to view regulation under the Alberta Utilities Commission (AUC) for the Company’s electricity distribution and transmission businesses, and regulation under the City for the Company’s water and wastewater businesses as supportive of the current ratings. DBRS does not expect the AUC’s 2016–2017 Generic Cost of Capital decision, which set a return on equity (ROE) of 8.3% for 2016 and 8.5% for 2017, nor the parameters for the 2018–2022 performance-based regulation (PBR) plan to have a material impact on the Company’s earnings and cash flows. Regulation for the water and wastewater businesses under the City has also remained stable, and the decrease in the ROE for the 2017–2021 PBR to 10.175% from 10.875% is not expected to have a material impact either. DBRS notes, however, that EUI’s business risk profile continues to be offset by the more challenging, albeit improving, regimes in Arizona and New Mexico, as the use of historical test years could result in greater regulatory lag.

On September 1, 2017, the City transferred its drainage operations to EUI (the Transfer). As noted in the April 17, 2017, press release, “DBRS Comments on the City of Edmonton’s Approval to Transfer Drainage to EPCOR Utilities Inc.,” DBRS views the Transfer as neutral to EUI’s business risk profile, as its operations are fully regulated by the City, albeit under regulation that is not as robust as the water and wastewater operations; however, drainage will transition to a similar regime in 2022. Additionally, DBRS noted that the Transfer might result in weaker key credit metrics for EUI in the medium term because of (1) the assumption of approximately $600 million of debt (along with non-contributed capital assets of approximately $1.1 billion), (2) an overall increase in capital expenditures (capex) of $1.6 billion over the next ten years for drainage, (3) increases to drainage rates being limited to 3% through 2021 and (4) an increase to annual distributions to the City by $20 million. Following the complete sell down of EUI’s ownership in Capital Power Corporation (rated BBB (low) with a Stable trend by DBRS) in January 2017, free cash flow deficits that arise as a result of the large capex program are expected to continue to be funded through debt. DBRS expects that the Company’s key credit metrics will be under pressure over the medium term but that they will remain in the “A” rating category. However, should the metrics weaken to a level no longer commensurate with the current ratings, a negative rating action may occur.

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 rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.