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

DBRS Limited (DBRS Morningstar) 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 trends are Stable. The confirmations reflect the stability of the Company's regulated electricity and water operations. The Stable trends are based on EUI's strong financial risk assessment and incorporate the modest deterioration expected year over year as the Company continues its large capital expenditures (capex) program.

EUI's business risk assessment has remained steady, with no material regulatory changes in 2019 and 2020. DBRS Morningstar also does not expect the ongoing Coronavirus Disease (COVID-19) pandemic to have a material impact on the Company's operational and financial performance. Although EUI's earnings for the year will likely be modestly lower than expected because of decreased electricity and water consumption from industrial and commercial customers, this has been largely offset by higher residential usage. Additionally, the Alberta Utilities Commission (AUC) has approved for deferral accounts to track increases in bad debt and losses in other revenues; recovery of these amounts will be subject to AUC approval.

EUI's financial risk assessment has also remained stable, with all key credit metrics strong for the current ratings. The current ratings factor in the modest year-over-year deterioration expected as the Company continues its significant capex program ($755 million in 2019) to refurbish aging infrastructure, especially for Drainage. The large capex will likely result in net free cash flow deficits for the medium term, which will be funded through debt issuances, leading to weaker metrics. However, DBRS Morningstar expects the metrics to settle in the "A" rating category, which is supportive of the current A (low) rating. DBRS Morningstar considers a positive rating action for EUI to be unlikely, given the business risk assessment and the ongoing capex program. However, should the Company's metrics deteriorate to a level no longer supportive of the current ratings, a negative rating action may occur.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 16, 2019), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

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