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 the Commercial Paper rating at R-1 (low). The trends on all ratings are Stable. The ratings on EUI are based on its regulated water and electric operations in Canada and the U.S., which provide steady earnings and cash flows. The Stable trends reflect the Company's key credit metrics, which have been strong for the rating but which DBRS Morningstar expects to moderate as EUI continues its significant capital expenditure (capex) program.

EUI's business risk assessment has been stable, supported by the Company's regulated operations. In October 2023, the Alberta Utilities Commission (AUC) issued its decision on the cost of capital parameters for 2024 and beyond. The deemed equity remained unchanged at 37%. However, the return on equity (ROE) will now be determined using a formulaic approach based on a notional ROE of 9.0% plus changes in bond yields and bond spreads. DBRS Morningstar considers this change to be modestly credit positive for EUI as (1) the notional ROE is higher than the previously approved 8.5% and should lead to higher earnings for 2024, (2) a formulaic approach should reduce the regulatory lag with generic cost-of-capital proceedings, and (3) the regulatory process is now more transparent and based on empirical data. The AUC also released its decision on the 2024–2028 performance-based regulation plan, which is largely a continuation of the current plan. DBRS Morningstar will continue to monitor the cost of capital proceeding and the final determination of the 2024 ROE in November.

EUI's financial risk assessment has been reasonable, with all key credit metrics strong for the current ratings. The Company's capex program remains substantial though, with average capex of around $900 million planned over the next four years ($800 million planned for 2023). As such, DBRS Morningstar expects EUI to continue generating net free cash flow deficits that will be financed through debt, leading to a deterioration in key credit metrics. DBRS Morningstar has factored this into its assessment and assumes the metrics will settle at the "A" rating category and in line with the current ratings. However, should the Company's key credit metrics decline to a level no longer supportive of the current ratings (such as cash flow-to-debt below 12.5%), a negative rating action may occur. A positive rating action is not likely at this time given 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 27, 2023; https://www.dbrsmorningstar.com/research/421106/global-methodology-for-rating-companies-in-the-regulated-electric-natural-gas-and-water-utilities-industry).

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196/dbrs-morningstar-global-criteria-commercial-paper-liquidity-support-for-nonbank-issuers).

The credit rating methodologies used in the analysis of this transaction can be found at:: https://www.dbrsmorningstar.com/about/methodologies.

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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