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. The confirmations are based on the continued stability of the Company's regulated businesses, which provide a steady stream of earnings and cash flows. The Stable trends reflect EUI's key credit metrics, which are currently strong for the ratings but which DBRS Morningstar expects to moderate as the Company continues its significant capital expenditures (capex) program.

EUI's business risk assessment continues to be supported by the Company's regulated operations. In June 2022, the Alberta Utilities Commission (AUC) approved the Company's negotiated settlement for electricity distribution rates effective 2023. DBRS Morningstar considers the distribution revenue requirement being based on a forecast cost-of-service basis to be a favourable development for the regulatory assessment in Alberta as the going-in rates for the 2018–22 Performance-Based Regulation (PBR) plan had been based on historical costs and the rate base adjusted for inflation and known changes. The AUC also initiated (1) a proceeding on parameters for the next PBR and (2) the 2024 Generic Cost of Capital, which will include exploring a shift to a formulaic approach for determining the return on equity (ROE). While a formulaic approach could potentially reduce regulatory lag and increase transparency in the process, DBRS Morningstar will assess whether the formula will result in ROEs that are predictable and continue to be reasonable for the "A" rating category.

EUI's financial risk assessment also continues to be reasonable, with all key credit metrics for the last 12 months ended June 30, 2022, strong for the current ratings. The Company's capex program remains significant, however (with an average of $900 million annually planned for the next five years), as it continues to refurbish aging infrastructure in the City of Edmonton (100% owner of EUI) and expand its footprint in the U.S. As such, DBRS Morningstar expects the Company to continue generating net free cash flow deficits over the medium term that will likely be debt financed, leading to a gradual weakening in key metrics. DBRS Morningstar has factored into EUI's current ratings that its key credit metrics will stabilize at the "A" rating category. 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. A positive rating action is viewed as unlikely for the medium term given the current business risk assessment and the ongoing capex program.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodologies are Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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