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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of EPCOR Utilities Inc. (EUI or the Company) at A (low), and the Commercial Paper rating at R-1 (low), all with Stable trends. The confirmation is based on the stability of the Company’s regulated electricity distribution and transmission, and its water and wastewater operations in Alberta, and the reasonable regulatory regimes of the Alberta Utilities Commission (AUC) and the City of Edmonton (the City; 100% owner of EUI). The ratings are also based on the Company’s strong financial risk profile.

EUI’s business risk profile continues to be supported by the reasonable regulations covering its regulated businesses. While the regulatory regime under the AUC did deteriorate slightly following the most recent Generic Cost of Capital (GCOC) and Utility Asset Disposition decisions, it remains supportive because of the high level of cost certainty under the framework. Proceedings on the 2016 GCOC are currently ongoing, with a decision expected by the end of the year. DBRS notes that given the already low allowed return on equity (ROE) and deemed equity, any further decreases could have a negative impact on the Company’s credit profile. In June 2016, EUI submitted to the City its 2017–2021 Performance Based Regulation application for its water and wastewater services. In its applications, the Company requested a modest decrease of the allowed ROE to 10.5% from 10.875% and to maintain its capital structure at 60% debt. DBRS does not expect the decrease to have a material impact on the Company should the proposed ROE be approved. In June 2016, EUI also requested a transfer of the City’s drainage utility services (Drainage) to the Company. City council voted to proceed with an independent, third-party assessment of the transfer, with a final report to be presented on October 25, 2016. Approval of the transfer is subject to a vote by the City council. DBRS notes that should the Drainage transfer be approved, EUI will assume approximately $447 million of debt and commit to an overall $1.5 billion capital expenditures (capex) program over the next ten years. DBRS will monitor the transfer as more information becomes available and will further assess the credit implications if City council votes to proceed with the transfer.

EUI’s financial risk profile remains strong with all key credit metrics supportive of the current ratings. As a result of the continuing high capex to improve and maintain the reliability of its systems, the Company generated a free cash flow deficit in 2015. EUI funded this deficit using proceeds from the sale of an additional 9% interest in Capital Power Corporation (CPC; rated BBB with a Negative trend by DBRS) in April 2015. As the Company’s ownership in CPC is now down to 9% (investment of approximately $181 million as at June 30, 2016), DBRS expects that future growth projects or potential acquisitions will likely be funded through debt issuances, which could result in a weakening of the Company’s key credit metrics. However, DBRS notes that there is some flexibility in EUI’s financial ratios for its current ratings. Going forward, DBRS expects free cash flow deficits to remain manageable and to be financed in a prudent manner in order for the Company to maintain its debt-to-capital ratio in line with the regulatory capital structure.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Financial Issuers, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.