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

DBRS Limited (Morningstar DBRS) confirms 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). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The ratings on EPCOR Utilities Inc. (EUI or the Company) 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 we expect to moderate as EUI continues its significant capital expenditure (capex) program. In November 2023, the Alberta Utilities Commission (AUC) approved a final return on equity (ROE) of 9.28% for the Alberta utilities effective January 1, 2024. As noted, Morningstar DBRS considers the new formulaic approach to be modestly positive for EUI as (1) the higher ROE 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.

CREDIT RATING DRIVERS
Morningstar DBRS considers a positive rating action to be unlikely at this time given the ongoing capex program. A negative rating action may occur 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% 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. Morningstar DBRS expects the Company's earnings to continue to be steady, 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 ratings. Morningstar DBRS has factored into the Company's ratings a modest weakening of the key credit metrics over the medium term because of the large, ongoing capex program that will be largely debt funded. Morningstar DBRS expects that over time, the metrics will settle and be in line with the current A (low) rating. In 2024, the Company has forecast net capex of around $1.0 billion ($779 million in 2023), with the increase largely attributable to the Samsung groundwater supply and industrial water reclamation facility projects. Morningstar DBRS notes that while Samsung had disputed certain charges billed by EUI at the end of 2023, these amounts have been materially reduced in Q1 2024.

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 the high level of planned capex, expansion into the U.S. and nonregulated activities, integration risk, and no access to equity markets.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a relevant or significant 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 Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

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 (January 30, 2024)
https://dbrs.morningstar.com/research/427244

The following methodology has also been applied:
DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023)
https://dbrs.morningstar.com/research/410196

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/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 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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