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

DBRS Limited (DBRS Morningstar) confirmed EPCOR Utilities Inc.'s (EUI or the Company) Issuer Rating and Senior Unsecured Debentures rating at A (low) and its Commercial Paper rating at R-1 (low). All trends are Stable. EUI's rating is based on its regulated businesses, which provide steady earnings and cash flows. The Stable trends reflect the Company's strong key credit metrics, which are expected to weaken modestly year over year because of its significant capital expenditures (capex) program, and settle in the "A" rating category.

EUI's business-risk assessment continued to be stable in 2020 and 2021. In October 2020 and March 2021, the Alberta Utilities Commission finalized the 2021 and 2022 return on equity (ROE) and deemed equity for the Alberta utilities at, respectively, 8.50% and 37.00%, unchanged from previous years. In August 2021, the City of Edmonton approved the Company’s Water, Drainage and Wastewater Treatment performance-based regulation applications. While the approved ROE for Water and Wastewater Treatment decreased to 9.64% from 10.175%, DBRS Morningstar expects EUI's overall earnings and cash flows to increase from the higher rate bases and because Drainage will be able to ramp up, over a five-year period, to earn its allowed ROE.

EUI has a significant ongoing capex program (average gross capex of $1 billion for the next five years), largely to refurbish its aging infrastructure. As a result, while the Company's key credit metrics have been strong for the current ratings, they are expected to continue weakening modestly year over year and eventually settle in the "A" category. DBRS Morningstar has factored this deterioration into the current ratings of EUI. However, should the Company's key credit metrics weaken to a level no longer commensurate with the current rating category, such as if debt financing for the capex program is substantially higher than forecast or if there is a delay in the recovery of capex, a negative rating action may occur.

EUI's key credit metrics remained strong in 2020 and in the last 12 months ended June 30, 2021. The ongoing Coronavirus Disease (COVID-19) pandemic has not materially affected the financial performance of the Company, with lower throughputs for commercial and industrial customers largely offset by higher residential usage. Additionally, although EUI has continued to pursue nonregulated activities, such as long-term contracts to build, operate, or own water and wastewater facilities, most capex spending has been and will continue to be in the regulated space. As such, DBRS Morningstar expects nonregulated operations to remain at or below 10% of earnings over the medium term; the Company’s credit profile may be negatively affected though if nonregulated activities grow to be a material portion of earnings. DBRS Morningstar considers a positive rating action for EUI to be unlikely, given the business-risk assessment and the ongoing capex program. However, should the Company's metrics deteriorate to a level no longer supportive of the current ratings, a negative rating action may occur.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 27, 2020; https://www.dbrsmorningstar.com/research/368939) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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