EDMONTON, ALBERTA — (Marketwired) — 11/07/13 — EPCOR Utilities Inc. (EPCOR) today filed its quarterly results for the three month and year-to-date periods ended September 30, 2013.
“EPCOR–s core water and wires operations performed well in the third quarter of 2013. Much of our focus in June and early July was on our southern Alberta operations which were affected by flooding. Thanks to the efforts of our people, water service was restored quickly and the overall impact to the customers and communities we serve was kept to a minimum,” said David Stevens, EPCOR President and CEO.
Highlights of EPCOR–s financial performance are as follows:
Management–s discussion and analysis (MD&A) of the quarterly results are shown below. The MD&A and the unaudited condensed consolidated interim financial statements are available on EPCOR–s website (), and SEDAR ().
EPCOR–s wholly owned subsidiaries build, own and operate electrical transmission and distribution networks, water and wastewater treatment facilities and infrastructure in Canada and the United States. The Company–s subsidiaries also provide electricity and water services and products to residential and commercial customers. EPCOR, headquartered in Edmonton, is an Alberta top 60 employer. EPCOR–s website address is .
This management–s discussion and analysis (MD&A) dated November 7, 2013, should be read in conjunction with the condensed consolidated interim financial statements of EPCOR Utilities Inc. and its subsidiaries for the three and nine months ended September 30, 2013 and 2012, the consolidated financial statements and MD&A for the year ended December 31, 2012 and the cautionary statement regarding forward-looking information on pages 13 and 14 of this MD&A. In this MD&A, any reference to “the Company”, “EPCOR”, “it”, “its”, “we”, “our” or “us”, except where otherwise noted or the context otherwise indicates, means EPCOR Utilities Inc., together with its subsidiaries. In this MD&A, Capital Power refers to Capital Power Corporation and its directly and indirectly owned subsidiaries including Capital Power L.P., except where otherwise noted or the context otherwise indicates. Financial information in this MD&A is based on the condensed consolidated interim financial statements, which were prepared in accordance with International Financial Reporting Standards (IFRS), and is presented in Canadian dollars unless otherwise specified. In accordance with its terms of reference, the Audit Committee of the Company–s Board of Directors reviews the contents of the MD&A and recommends its approval by the Board of Directors. This MD&A was approved and authorized for issue by the Board of Directors on November 7, 2013.
OVERVIEW
EPCOR is wholly-owned by The City of Edmonton (the City). EPCOR builds, owns and operates electrical transmission and distribution networks in Canada as well as water and wastewater treatment facilities and infrastructure in Canada and the United States (U.S.). EPCOR also provides electricity and water services and products to residential and commercial customers. EPCOR–s electricity (collectively the Distribution and Transmission and Energy Services segments) and water (including wastewater treatment) businesses consist primarily of rate-regulated and long-term commercial contracted operations. EPCOR–s continuous improvement objective is to maximize the efficiency of its electricity and water operations.
EPCOR–s net income was $50 million and $152 million, respectively, for the three and nine months ended September 30, 2013 compared with net income of $63 million and $87 million, respectively, for the comparative periods in 2012.
EPCOR–s core operations performed well in the third quarter without any significant issues or disruptions to customers. Several of the southern Alberta municipalities in which EPCOR operates experienced flooding in the latter half of June and early July. The impact on our operations was minimal. Income from core operations was $33 million and $112 million, respectively, for the three and nine months ended September 30, 2013, compared with $35 million and $87 million, respectively, for the comparative periods in 2012. Income from core operations is a non-IFRS financial measure; see Non-IFRS Financial Measure on pages 10 and 11 of this MD&A.
Our 2013 capital expenditure plan includes work continued from 2012 on several significant upgrade projects such as the annual water main renewal program to improve Edmonton–s water distribution system, a new water laboratory and related office building, a project to replace the gaseous chlorine chemical system at the Rossdale water treatment plant with an on-site hypochlorite generation system, upgrades to a digester and pre-treatment and solids handling infrastructure project at the Gold Bar wastewater treatment facility (Gold Bar), an underground electricity distribution cable replacement and extension program, and, in partnership with Altalink, L.P., construction of the Heartland electricity transmission line. Our capital expenditure plan also includes various new capital projects. This plan is aimed towards better water management practices and improvement of electricity distribution and transmission infrastructure to replace aging infrastructure and meet the growing demand for electricity. Expenditures on certain distribution capital projects will be on hold until the Company receives a decision from the Alberta Utilities Commission on its 2013 capital tracker application discussed in further detail under Outlook below.
CONSOLIDATED RESULTS OF OPERATIONS
Net Income
Net income was lower for the three months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to the net impact of the following:
Net income was higher for the nine months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to the net impact of the following:
Revenues
Consolidated revenues were higher by $3 million and $1 million for the three and nine months ended September 30, 2013, respectively, compared with the corresponding periods in 2012 primarily due to the net impact of the following:
Capital Spending and Investment
Total capital spending and investment was lower for the nine months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to the acquisition of the U.S. water businesses in 2012 with no similar acquisition in 2013, partially offset by higher capital expenditures for property, plant and equipment for the nine months ended September 30, 2013 compared to the corresponding period in 2012 primarily due to increased construction activity on the Heartland electricity transmission line, reflecting EPCOR–s 50% share of the project.
The total cost to construct the Heartland transmission line, in partnership with AltaLink L.P., is now expected to be $450 million, an increase of $20 million from the $430 million disclosed in the second quarter of 2013. As a result, the Company now expects its share of 2013 capital expenditures on the project to be $123 million instead of $105 million as previously disclosed. EPCOR–s 50% share of the increased total cost is expected to be $225 million. The increase in expected total cost of the Heartland transmission line primarily results from changes to scope of work and an extension of the construction schedule due to unfavorable weather conditions.
SEGMENT RESULTS
Water Services
Water Services– operating income increased by $5 million and $28 million for the three and nine months ended September 30, 2013, respectively, compared with the corresponding periods in 2012 primarily due to higher approved customer rates. In addition, operating income was higher for the nine months ended September 30, 2013 compared with the corresponding period in 2012 due to a provision recorded in the first quarter of 2012 related to a water rate complaint by an Edmonton regional water customer group with no similar provision recorded in 2013 and costs incurred in 2012 to integrate the U.S. water operations acquired on January 31, 2012 with no such costs incurred in 2013. Partially offsetting the increase for the nine months ended September 30, 2013 were higher chemical costs compared with the corresponding period in 2012 primarily due to higher precipitation in 2013 resulting in higher turbidity in the North Saskatchewan river compared with the corresponding periods in 2012.
Distribution and Transmission
Distribution and Transmission–s operating income decreased $9 million for the three months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to higher transmission flow-through charges not yet approved to be billed to customers.
Distribution and Transmission–s operating income decreased $14 million for the nine months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to higher transmission flow-through charges not yet approved to be billed to customers. Partially offsetting the decrease was higher transmission tariff revenues related to 2012 Alberta Electric System Operator flow-through charges which were expensed as incurred in 2012 and not billed to customers until 2013 due to the electricity rate freeze which ended in the first quarter of 2013, as discussed above, and higher system access service revenues as a result of higher approved interim rates.
Energy Services
Energy Services– operating income increased by $6 million for the nine months ended September 30, 2013, compared with the corresponding period in 2012 primarily due to improved Energy Price Setting Plan margins and no contact center consolidation costs incurred in 2013 compared with the corresponding period in 2012. Partially offsetting these increases were lower favorable fair value adjustments related to financial electricity purchase contracts in 2013 compared to 2012.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
CONSOLIDATED STATEMENTS OF CASH FLOWS
LIQUIDITY AND CAPITAL RESOURCES
The Company has credit facilities, which are used principally for the purpose of backing our commercial paper program and providing letters of credit, as outlined below:
Letters of credit are issued to meet the credit requirements of electricity market participants and conditions of certain service agreements.
The Company has a Canadian base shelf prospectus under which it may raise up to $1 billion of debt with maturities of not less than one year. At September 30, 2013, the available amount remaining under this shelf prospectus was $700 million (December 31, 2012 – $700 million). The shelf prospectus expires in January 2014. The Company is presently preparing a new Canadian shelf prospectus that it expects to file in the fourth quarter of 2013.
The Company–s working capital and contractual obligations for the remainder of 2013 will be funded from cash on hand, operating cash flows, limited partnership distributions from Capital Power, interest and principal payments related to the long-term receivable from Capital Power, and if necessary, commercial paper issuance, drawing upon existing credit facilities, public and private debt offerings or the sale of a portion of our interest in Capital Power.
$75 million of commercial paper was issued and outstanding at September 30, 2013 (December 31, 2012 – nil).
EPCOR is currently in compliance with all of its financial covenants as set out in its bank credit agreements and the financial covenants of its Canadian public medium-term notes and U.S. private-debt notes. Based on current financial covenant calculations, the Company has sufficient capacity to borrow to fund current and long-term requirements. Although the risk is low, breaching these covenants could potentially result in a revocation of EPCOR–s credit facility causing a significant loss of access to liquidity.
If the economy were to deteriorate, particularly in Canada and the U.S., the Company–s ability to renew credit facilities, arrange long-term financing for its capital expenditure programs and acquisitions, or refinance outstanding indebtedness when it matures could be adversely impacted and the Company may suffer a credit rating downgrade. We believe that these circumstances have a low probability of occurring, however, we continue to monitor EPCOR–s capital programs and operating costs to minimize the risk that the Company becomes short of cash or unable to honor its obligations.
In July 2013, Standard & Poor–s affirmed its BBB+ long-term corporate credit and senior unsecured debt ratings for EPCOR Utilities Inc. and revised its outlook to positive from stable.
CONTRACTUAL OBLIGATIONS
During the first nine months of 2013, there were no material changes to the Company–s purchase obligations, including payments for the next five years and thereafter, other than an increase in financial electricity purchase contracts valued at $95 million at September 30, 2013 (December 31, 2012 – $52 million). The increase results from the amendment to the Company–s Energy Price Setting Plan approved by Alberta Utilities Commission in August 2013, which among other things, extended the procurement purchasing window from 45 days to 120 days in advance of the customer consumption date.
For further information on the Company–s contractual obligations, refer to the 2012 annual MD&A.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2013, the Company adopted accounting policies in accordance with the following new and amended accounting standards relevant to EPCOR:
Of the new and amended accounting standards which became effective January 1, 2013, the following had an impact on the Company as a result of accounting policies adopted effective January 1, 2013:
IFRS 11 was issued to replace IAS 31 – Interest in Joint Ventures. The new standard classifies joint arrangements into two types, joint operations and joint ventures. The standard defines a joint operation as a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement and are required to recognize assets, liabilities, revenues and expenses in proportion to its interest in the joint arrangement. The standard defines a joint venture as a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement and are required to recognize and account for the investment in the joint arrangement using the equity method. The Company applied the new standard effective January 1, 2013 and classified its interest in the Heartland Transmission project as a joint operation. As a result, the Company–s condensed consolidated interim financial statements for the periods ended September 30, 2013 and 2012, include EPCOR–s relative share of the joint operation–s assets, liabilities, revenue and expenses with items of a similar nature on a line-by-line basis. Unrealized gains and losses on transactions between EPCOR and the joint operation are eliminated to the extent of EPCOR–s interest in the joint operation, and unrealized losses are eliminated only to the extent there is no evidence of impairment.
IFRS 13 replaced the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements. The Company does not expect the standard to have a material impact on the annual financial statements. However, IAS 34 was amended as a result of IFRS 13, to require financial instrument fair value disclosure in an entity–s interim financial statements.
IAS 19 was amended to: (a) eliminate the option to defer the recognition of actuarial gains and losses associated with net defined benefit liabilities (assets); (b) require a new method of calculating finance costs on defined benefit plans whereby a single discount rate is applied to the net pension assets or obligations; and (c) enhance the disclosure requirements to provide better information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in these plans. In accordance with the transitional provisions of revised IAS 19, the Company applied the revised standard retrospectively commencing January 1, 2013 and recognized in retained earnings, $1 million of unrecognized actuarial gains related to 2012 and $6 million of unrecognized actuarial losses related to years prior to 2012, and in accumulated other comprehensive income, $8 million of remeasurement effects related to years prior to 2013. In addition, the Company increased non-current provisions by $13 million.
CRITICAL ACCOUNTING ESTIMATES
In preparing the condensed consolidated interim financial statements, management necessarily made estimates in determining transaction amounts and financial statement balances. The following are the items for which significant estimates were made in the condensed consolidated interim financial statements: electricity revenues and costs, unbilled consumption of electricity and water, fair values, allowance for doubtful accounts, useful lives of assets and income taxes. Interim results will fluctuate due to the seasonal demands for electricity and water, changes in electricity prices, and the timing and recognition of regulatory decisions. Consequently, interim results are not necessarily indicative of annual results.
For further information on the Company–s other critical accounting estimates, refer to the 2012 annual consolidated financial statements and 2012 annual MD&A.
NON-IFRS FINANCIAL MEASURE
Management uses income from core operations to distinguish operating results from the Company–s core water and electricity businesses from results with respect to its investment in Capital Power. It is a non-IFRS financial measure, which does not have any standardized meaning prescribed by IFRS and is unlikely to be comparable to similar measures published by other entities. However, it is presented since it provides a useful measure of the Company–s primary operations and it is referred to by debt holders and other interested parties in evaluating the Company–s financial position and in assessing its creditworthiness.
A reconciliation of income from core operations to net income is as follows:
RISK MANAGEMENT
This section should be read in conjunction with the Risk Management section of the 2012 annual MD&A. EPCOR faces a number of risks including risks related to its investment in Capital Power, operational risks, political, legislative and regulatory risk, strategy execution risk, weather risk, financial liquidity risk, environment risk, electricity price and volume risk, project risk, availability of people, credit risk, health and safety risk, conflicts of interest, foreign exchange risk and general economic conditions and business environment risks. The Company employs active programs to manage these risks.
As part of ongoing risk management practices, the Company reviews current and proposed transactions to consider their impact on the risk profile of the Company. There have been no material changes to the risk profile or risk management strategies of EPCOR as described in the 2012 annual MD&A that have affected the condensed consolidated interim financial statements for the three and nine months ended September 30, 2013.
OUTLOOK
In October 2013, EPCOR sold 9.6 million common shares of Capital Power at an offering price of $21.00 per share for aggregate gross proceeds of $202 million. Following the completion of the offering, EPCOR indirectly owns approximately 19% of Capital Power. The proceeds from the October sale will be used to repay commercial paper indebtedness and for general corporate purposes. The Company will incur a net loss of $16 million after tax as a result of this transaction.
In 2013, the Company intends to focus on continued growth in water and electricity rate-regulated infrastructure in conjunction with further expansion of commercial water operations.
Demand for clean drinking water is expected to continue to increase as the population grows, and we anticipate increased requirements for better water management practices including watershed management and conservation. With municipal budgets under pressure, municipal governments are considering the opportunities presented by public-private partnerships. At the same time, the Alberta oil and gas industry continues to seek assistance with water treatment and management at sites where they operate. EPCOR will continue pursuing commercial water contract opportunities in Western Canada in 2013.
Approval of the Company–s interim-to-final rate true-up application with respect to its 2012 electricity distribution general tariff rates was received in the third quarter of 2013. The true-up amounts will be billed to customers in the fourth quarter of 2013.
In April 2013, interim refundable rates under the new performance based regulation applicable to the Distribution and Transmission–s electricity distribution business came into effect. The interim refundable rates allow Distribution and Transmission to include 60% of the capital applied for under the limited additional capital provisions of the performance based regulation (K-Factor). The K-Factor is an adjustment for revenues over and above the capital-related revenues funded under the performance based regulation formula related to capital projects meeting specific criteria outlined in the performance based regulation decision. A decision on the related joint utility hearing regarding the K-Factor is expected in the fourth quarter of 2013. The K-Factor hearing decision could have an impact on the final rates for 2013 with any resulting true-up of the difference between interim rates and final rates expected to occur in 2014.
The Alberta Electric System Operator has outlined significant capital development for Alberta–s electricity transmission infrastructure and has received approval from the Alberta Utilities Commission to develop certain projects through a competitive bid process. The first project expected to go through the process is the proposed west Fort McMurray electricity transmission project. This would differ from the historic process whereby each transmission facility owner develops, owns and operates all transmission facilities within their designated service area. EPCOR now has the opportunity to bid on this project.
QUARTERLY RESULTS
Events for the past eight quarters compared to the same quarter of the prior year that have significantly impacted net income include:
Forward – looking information
Certain information in this MD&A is forward-looking within the meaning of Canadian securities laws as it relates to anticipated financial performance, events or strategies. When used in this context, words such as “will”, “anticipate”, “believe”, “plan”, “intend”, “target”, and “expect” or similar words suggest future outcomes.
The purpose of forward-looking information is to provide investors with management–s assessment of future plans and possible outcomes and may not be appropriate for other purposes. Forward-looking information in this MD&A includes: (i) expectations regarding the Company–s 2013 capital expenditure plan; (ii) sources of funding for 2013 working capital and contractual obligations; (iii) the Company–s growth plans and expected future investment opportunities; (iv) expectations regarding demands for clean drinking water; (v) expectations regarding Alberta–s electricity transmission infrastructure project opportunities; and (vi) expectations regarding future regulatory proceedings, decisions and filings and their potential impact on the Company.
These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments and other factors it believes are appropriate. The material factors and assumptions underlying this forward-looking information include, but are not limited to: (i) the operation of the Company–s facilities; (ii) the Company–s assessment of the markets and regulatory environments in which it operates; (iii) weather; (iv) availability and cost of labor and management resources; (v) performance of contractors and suppliers; (vi) availability and cost of financing; (vii) foreign exchange rates; (viii) management–s analysis of applicable tax legislation; (ix) the currently applicable and proposed tax laws will not change and will be implemented; (x) counterparties will perform their obligations; (xi) expected interest rates and related credit spreads; (xii) ability to implement strategic initiatives which will yield the expected benefits; (xiii) the Company–s assessment of capital markets; and (xiv) factors and assumptions in addition to the above related to the Company–s equity interest in Capital Power.
Whether actual results, performance or achievements will conform to the Company–s expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results and experience to differ materially from EPCOR–s expectations. The primary risks and uncertainties relate to: (i) operation of the Company–s facilities; (ii) unanticipated maintenance and other expenditures; (iii) electricity load settlement; (iv) regulatory and government decisions including changes to environmental, financial reporting and tax legislation; (v) weather and economic conditions; (vi) competitive pressures; (vii) construction; (viii) availability and cost of financing; (ix) foreign exchange; (x) availability of labor and management resources; (xi) performance of counterparties, partners, contractors and suppliers in fulfilling their obligations to the Company; (xii) availability and price of electricity; (xiii) customer consumption volumes of water and electricity; and (xiv) risks in addition to the above related to the Company–s equity interest in Capital Power, including power plant availability and performance.
This MD&A updates previously issued forward-looking statements related to the construction of the Heartland transmission line to state that the total cost to construct the Heartland transmission line is now expected to be $450 million rather than $430 million with the Company expending $123 million on the project in 2013 rather than $105 million, as previously disclosed.
Readers are cautioned not to place undue reliance on forward-looking statements as actual results could differ materially from the plans, expectations, estimates or intentions expressed in the forward-looking statements. Except as required by law, EPCOR disclaims any intention and assumes no obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.
ADDITIONAL INFORMATION
Additional information relating to EPCOR including the Company–s 2012 Annual Information Form is available on SEDAR at .
Contacts:
Media Relations:
EPCOR Utilities Inc.
Tim le Riche
(780) 969-8238
Corporate Relations:
EPCOR Utilities Inc.
Claudio Pucci
(780) 969-8245 or toll free (877) 969-8280