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

DBRS Limited (DBRS) confirmed the Issuer Rating and the 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 strong financial risk assessment.

EUI’s business risk assessment is based on the Company’s diverse range of regulated operations. DBRS considers the Company’s electricity distribution and transmission operations under the Alberta Utilities Commission (approximately 34% of EBIT over the last 12 months ending June 30, 2019 (LTM 2019)) and its water, waste-water and drainage businesses regulated by the City (approximately 38% of EBIT over LTM 2019) as supportive of the “A” rating range. This is partly offset by EUI’s water and waste-water businesses in Arizona and New Mexico (approximately 20% of EBIT over LTM 2019), which DBRS views as having a more challenging regulatory environment because of the use of historical test years that results in greater regulatory lag. DBRS notes the earnings contributed by non-regulated operations now represent less than 5% of EBITDA following the transfer of drainage operations to the Company from the City in September 2017. DBRS expects the earnings mix for EUI to remain relatively stable going forward, with capex largely targeted for regulated operations.

Earnings and cash flows for EUI increased significantly in 2018, reflecting the first full year of drainage operations. As a result, key credit metrics all recovered to historical levels (2017 results had included only four months of contribution from drainage but included all the debt that had been transferred). DBRS expects the Company’s key credit metrics to weaken over time though as it undergoes a significant capex program for refurbishing aging infrastructure (total gross capex of approximately $900 million for 2019). EUI is expected to fund its capex program through a combination of operating cash flows and debt issuances, which will result in a moderate deterioration in key credit metrics over the next few years. DBRS has factored this deterioration into the current rating and expects the metrics to be in the “A” rating category; however, should the metrics deteriorate to a level no longer supportive of the current ratings, a negative rating action may occur. DBRS considers a positive rating action for EUI as unlikely over the medium term given the more challenging regulatory environments for the U.S. water operations and the ongoing 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 (September 2019), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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