Morningstar DBRS Confirms EPCOR Utilities Inc. at A (low)/R-1 (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed EPCOR Utilities Inc.'s (EUI or the Company) Issuer Rating and Senior Unsecured Debentures ratings both at A (low), and the Commercial Paper rating at R-1 (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
EUI's credit ratings are based on its regulated water and electric operations in Canada and the U.S. The Stable trends reflect the Company's financial risk profile, with all key credit metrics supportive of the "A" credit rating category. There have been no material changes in EUI's operations since the most recent review in April 2024.

CREDIT RATING DRIVERS
Morningstar DBRS considers a positive credit rating action to be unlikely in the near term given the ongoing capital expenditure (capex) program. A negative credit rating action may occur should the Company's key credit metrics decline to a level that is no longer supportive of the current credit ratings (such as cash flow-to-debt below 12.5% and debt-to-capital above 65%).

EARNINGS OUTLOOK
EUI's earnings have been steady, benefitting from the stability of its regulated operations and annual growth in its rate base. The Company's earnings increased significantly for the last 12 months ended September 30, 2024 (LTM 2024), largely because of stronger results from its Water Services segment, which benefited from higher rates, consumption, and customer growth. Morningstar DBRS expects earnings to be steady in 2025 with growth in line with the rate base, and with fluctuations year over year to largely be from consumption- and weather-related impacts.

FINANCIAL OUTLOOK
EUI's key credit metrics have been supportive of the current credit ratings. The Company's metrics recovered slightly in LTM 2024 following weakness in 2023 because of the stronger earnings for the period. Overall, we expect EUI's metrics to weaken modestly over the medium-term as its capex program will largely be debt financed (net capex of around $1.0 billion in 2024 and $1.1 billion in 2025) but will remain supportive of the A (low) credit rating.

CREDIT RATING RATIONALE
EUI's ratings are supported by its low business risk, diversified asset portfolio, and strong financial profile. This is partly offset by its higher risk U.S. and nonregulated activities, integration risk, and the high level of planned capex.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of EUI, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of EUI, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of EUI, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (November 25, 2024),
https://dbrs.morningstar.com/research/443429.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024),
https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186; and
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024),
https://dbrs.morningstar.com/research/437781.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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