DBRS Releases Report on EPCOR Utilities Inc.

On May 7, 2007, DBRS confirmed the ratings of EPCOR Utilities Inc. (EPCOR or the Company) and related entities at A (low) for the Senior Unsecured Debentures, R-1 (low) for Commercial Paper and Pfd-2 (low) for the Series I – Cumulative Redeemable First Preferred Shares. The trends remain Stable. The ratings reflect EPCOR’s stable financial profile and strong credit metrics offset by its changing business mix and growing exposure to higher-risk non-regulated activities.

EPCOR’s business mix continues to change, with approximately 27% (DBRS estimate) of its earnings currently derived from non-regulated activities and non-contracted generation capacity. This mix is expected to remain relatively stable in the medium to long term even with the growth in the Company’s merchant capacity. As the Company continues to grow its generation portfolio, it continues to take steps to mitigate the risks associated with its exposure to merchant generation by entering into long-term contracts with strong counterparties or building baseload generation.

Growth within the province of Alberta has provided a significant need for capital investment in transmission system upgrades and new generation. The recently announced $1.6 billion Keephills 3 coal-fired generation joint venture (50/50) with TransAlta Corporation (TransAlta) is one of the growth projects EPCOR currently has under development. As a result of EPCOR’s overall increased capital spending, significant free cash flow deficits are anticipated in the near to medium term. One hundred per cent debt financing of these deficits would cause at least an interim deterioration in credit metrics until projects are placed in service and incremental earnings are realized. Any alternative form of financing that could be used to fund the deficits would alleviate much of the potential credit metric deterioration.

Despite the anticipated pressure on the balance sheet and coverage ratios, DBRS believes credit metrics will remain within a range consistent with the current ratings. Completing capital projects on time and within budget is key to maintaining a stable financial profile. Furthermore, EPCOR’s financing strategy remains reasonable, with additional room for modest increase in leverage in the medium term.

The Company’s divestiture of its non-strategic assets over the past few years has helped to further strengthen its financial profile, as proceeds were largely used to pay down debt and redeem preferred shares. As a result, the Company’s adjusted leverage ratio improved to 37.7% as at June 30, 2007 from 47.3% as at December 31, 2005.

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