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 ratings reflect the stable operations of the Company’s regulated utilities in the City of Edmonton (the City; 100% owner of EUI) and its robust key financial metrics.

EUI’s business risk profile continues to be 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, waste-water and drainage businesses, as supportive of the current ratings. In August 2018, the AUC issued its decision on the Alberta utilities’ 2018–2020 Generic Cost of Capital (GCOC) proceeding. The AUC maintained the return on equity (ROE) at 8.5% and equity thickness at 37%. DBRS views the decision as neutral for EUI’s earnings and cash flows, but notes that it does remove uncertainty regarding these perimeters for the next two years. EUI’s business risk profile continues to be partly offset by the more challenging, albeit improving, regimes in Arizona and New Mexico, where 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 its September 29, 2017, rating report, DBRS continues to view the Transfer as neutral to EUI’s overall business risk profile as drainage operations are fully regulated by the City, albeit under a less robust regulation compared to its water and waste-water operations. DBRS notes that as the Company has committed to cap rate increases for the Drainage business at 3% through 2021, this may limit earnings and cash flow growth from this segment because of the significant capital expenditures (capex) required. This large capex program is expected to result in free cash flow deficits for the medium term, which will likely be funded through debt. As such, DBRS expects EUI’s key financial metrics to be pressured and see deterioration over the next few years. DBRS has factored this deterioration into the current rating; however, should the metrics deteriorate to a level no longer supportive of the current ratings, a negative rating action may occur. Additionally, a positive rating action is unlikely given the more challenging regulatory environments for the U.S. water operations and the current large capex program.

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 and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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