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EDMONTON, Nov. 6, 2009 (Canada NewsWire via COMTEX) -- EPCOR Utilities Inc. (EPCOR) today released its quarterly results for the period ended September 30, 2009. "Looking beyond the Capital Power transaction, our performance for the third-quarter was on target. We are now beginning to see the benefits of the Gold Bar Wastewater Treatment Plant transfer on March 31 of this year. We believe that we are in a strong position for growth going forward, and our fourth-quarter results will reflect the recently-announced Suncor potable and domestic wastewater assets acquisition." "The Capital Power transaction, which closed at the beginning of the third quarter, resulted in the sale of the generation business to Capital Power at a fair value which was lower than the book value, resulting in a loss recorded in this quarter's results," said Don Lowry, President and CEO. "We had anticipated this result and noted an estimate of the loss in our second quarter Interim Report."
<<
Highlights of EPCOR's financial performance:
- Cash flow from operating activities for the three months ended
September 30, 2009 was $65 million compared with $139 million for the
corresponding period in the previous year.
- Cash flow from operating activities for the nine months ended
September 30, 2009 was $316 million compared with $278 million for
the corresponding period in the previous year.
- Net loss was $56 million on revenues of $350 million for the three
months ended September 30, 2009 compared with net income of
$76 million on revenues of $954 million for the corresponding period
in the previous year.
- Net income was $98 million on revenues of $1,980 million for the nine
months ended September 30, 2009 compared with $160 million on
revenues of $2,618 million for the corresponding period in the
previous year.
- Other comprehensive income was $9 million for the three months ended
September 30, 2009 compared with $6 million for the corresponding
period in the previous year.
- Other comprehensive income was $13 million for the nine months ended
September 30, 2009 compared with $30 million for the corresponding
period in the previous year.
- Investment in capital projects for the three months ended
September 30, 2009 was $65 million compared with $171 million for the
corresponding period in the previous year.
- Investment in capital projects for the nine months ended
September 30, 2009 was $369 million compared with $465 million for
the corresponding period in the previous year.
>>
Management's discussion and analysis (MD&A) of the quarterly results are shown below. The MD&A and the unaudited interim financial statements are available on EPCOR's website (www.epcor.ca) and will be available on SEDAR (www.sedar.com). EPCOR's wholly-owned subsidiaries build, own and operate electrical transmission and distribution networks, water and wastewater treatment facilities and infrastructure in Canada. EPCOR, headquartered in Edmonton, Alberta, has been named one of Canada's Top 100 employers for nine consecutive years, and was selected one of Canada's 10 Most Earth-Friendly Employers. EPCOR's website is www.epcor.ca.
<<
EPCOR Utilities Inc.
Interim Management's Discussion and Analysis
September 30, 2009
-------------------------------------------------------------------------
>>
This management's discussion and analysis (MD&A), dated November 6, 2009, should be read in conjunction with the unaudited interim consolidated financial statements of EPCOR Utilities Inc. and its subsidiaries for the three and nine months ended September 30, 2009 and 2008, the audited consolidated financial statements and MD&A for the year ended December 31, 2008 and the cautionary statement regarding forward-looking information on page 27. In this MD&A, any reference to "the Company", "EPCOR", "we", "our" or "us", except where otherwise noted or the context otherwise indicates, means EPCOR Utilities Inc., together with its subsidiaries. Financial information in this MD&A is based on the unaudited interim consolidated financial statements, which were prepared in accordance with Canadian generally accepted accounting principles (GAAP), 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. The Board of Directors has approved this MD&A. OVERVIEW EPCOR is wholly-owned by The City of Edmonton. EPCOR's distribution and transmission and water operations continued to deliver good results, and earnings from operating activities met our expectations for the third quarter. Water revenues from the City of Edmonton customer base benefited from rate increases on April 1, 2009 and higher sales volumes due to drier and warmer than normal weather conditions in the third quarter. Earnings from our water operations also benefitted from contributions from the Gold Bar Wastewater Treatment Plant (Gold Bar) operation which was transferred to EPCOR on March 31, 2009. Gold Bar systems and personnel are now substantially integrated with EPCOR operations. On May 8, 2009, EPCOR announced its plans to create Capital Power Corporation and sell substantially all of its power generation assets and related operations to Capital Power Corporation and its subsidiaries (Capital Power), as described under Significant Events. The sale was effective early July 2009 and EPCOR's results for the third quarter were impacted by a loss on the sale of the power generation business and the changes in operations resulting from that sale. Canadian and U.S. financial markets continued to stabilize in the third quarter of 2009. Narrower credit spreads on the notes which EPCOR received in exchange for its Canadian non-bank sponsored asset-backed commercial paper (ABCP) resulted in a $1 million increase in the fair value of the notes in the quarter. As described under Liquidity and Capital Resources, we applied the cash received from the sale of the power generation business in the quarter against our short-term borrowings. SIGNIFICANT EVENTS Sale of the power generation business On May 8, 2009, EPCOR announced its plans to create Capital Power, a power generation company that is headquartered in Edmonton. The final prospectus for the initial public offering of 21,750,000 common shares of Capital Power, at $23.00 per common share, was filed with securities regulators in Canada on June 25, 2009. The initial public offering closed on July 9, 2009. Through a series of transactions (the Reorganization), EPCOR sold substantially all of its power generation assets net of certain liabilities, and related operations including its 30.6% interest in EPCOR Power LP (Power LP), to Capital Power, effective early July 2009. The assets and related operations were previously included in EPCOR's Generation and Energy Services segments. EPCOR also entered into various agreements with Capital Power to provide for certain aspects of the separation of the power generation business from EPCOR, to provide for the continuity of operations and services and to govern the ongoing relationships between the two groups of entities. The total consideration for the sale consisted of $468 million of cash, 56.6 million exchangeable limited partnership (LP) units of Capital Power LP (CPLP) and $896 million in long-term loans receivable from CPLP. In addition, EPCOR holds one special limited voting share in Capital Power providing the right to vote separately as a class in connection with certain amendments to the articles of Capital Power, including an amendment to change or permit the change of the location of the head office of Capital Power from the city of Edmonton. Effectively, EPCOR sold 27.8% of its interest in the power generation business and through its equity investment in Capital Power, retains a 72.2% interest in that business. The difference between EPCOR's net carrying amount of its investment in the power generation business ($2,855 million) and the consideration received resulted in a loss on sale of $80 million including $37 million in direct expenses incurred in connection with the sale plus a $35 million income tax charge related to net future income tax assets that are not realizable by the Company as a result of the sale. Certain aspects of the sale related to the determination of minor assets and liabilities transferred to Capital Power have yet to be finalized. When these are finalized in the fourth quarter a change in the amount of the recognized loss on sale could result. However, the final amount of the loss is not expected to differ materially from the amount reported in the third quarter. Immediately following completion of the Reorganization, EPCOR held 56.6 million exchangeable LP units of CPLP (exchangeable for common shares of Capital Power on a one-for-one basis) representing approximately 72.2% of CPLP, while Capital Power held the remaining 27.8%. Each exchangeable LP unit is accompanied by a special voting share of Capital Power which entitles the holder to a vote at Capital Power shareholder meetings, subject to the restriction that such voting shares must at all times represent not more than 49% of the votes attached to all Capital Power common shares and special voting shares together. The special shares also entitle EPCOR to elect a maximum of four out of twelve directors of Capital Power. As a result of these restrictive rights, EPCOR has significant influence, but not control, of Capital Power and therefore has used the equity method to account for its investment in CPLP. Effective July 2009, income from Power LP has been included in the income from EPCOR's equity investment in CPLP as EPCOR no longer consolidates Power LP in its consolidated financial statements. Power LP is a subsidiary of CPLP. EPCOR plans to eventually sell all or a substantial portion of its ownership interest in Capital Power subject to market conditions, requirements for capital and other circumstances that may arise in the future, and reinvest the proceeds from the share sales in EPCOR's utility infrastructure businesses, including water and wastewater treatment, and power transmission and distribution. Asset-backed commercial paper exchanged for notes On January 21, 2009, the restructuring of ABCP was implemented. Under the restructuring, the affected ABCP was exchanged for term floating-rate notes (notes), maturing no earlier than the scheduled termination dates of the underlying assets. The exchange was recorded at the estimated fair value of the ABCP on January 21, 2009. The key information on EPCOR's notes is as follows:
<<
(i) EPCOR's allocation of notes under the restructuring was as follows:
-------------------------------------------------------------------
Pool Series Credit Face amount
Rating ($ millions)
-------------------------------------------------------------------
MAV2 Class A-1 A $ 47 67%
Class A-2 BBB 9 13%
Class B Unrated 2 2%
Class C Unrated 2 2%
MAV3 IA Tracking Unrated 11 16%
-------------------------------------------------------------------
$ 71 100%
-------------------------------------------------------------------
-------------------------------------------------------------------
(ii) For the Master Asset Vehicle 2 (MAV2) pool notes, the underlying
asset lives are anticipated to average nine years. The remaining
notes come from Master Asset Vehicle 3 (MAV3) in the form of
Ineligible Asset Tracking (IA Tracking) notes. These notes are
expected to amortize over the lives of the underlying assets which
have a weighted average life of approximately 18 years. In certain
limited circumstances, the expected repayment dates could be longer
than the expected asset lives.
(iii) ABCP investors, including EPCOR, were paid the accumulated accrued
interest, net of ABCP restructuring costs, collateral requirements
and other costs, on their existing ABCP from the date of the
standstill in August 2007 to the date of the restructuring. For the
three and nine months ended September 30, 2009, EPCOR received $nil
and $4 million respectively, of accrued interest on ABCP and
interest on the new notes.
>>
At September 30, 2009, the Company held $41 million in notes, all of which were received in exchange for ABCP which was purchased during the third quarter of 2007 at an original cost of $71 million. As the notes are classified as held-for-trading financial assets, they are subject to ongoing fair value adjustments at each reporting date. At September 30, 2009, the fair value of the notes was estimated at $41 million compared with a fair value of $40 million and $42 million for the notes at June 30, 2009 and ABCP at December 31, 2008, respectively. The $1 million increase for the third quarter was primarily due to narrower indicative corporate credit spreads versus the Government of Canada yield curve. The $2 million decrease in the first half of the year was primarily due to lower short-term and higher long-term market interest rates which were taken into account in calculating the fair value of the notes, partly offset by narrower credit spreads. In 2008, $2 million and $11 million reductions in the fair value of the ABCP were recognized in the third quarter and first nine months, respectively. The estimate of fair value is subject to significant risks and uncertainties including the timing and amount of future cash payments, market liquidity, the quality and tenor of the assets and instruments underlying the notes, including the possibility of margin calls, and the future market for the notes. Accordingly, the fair value estimate of the notes may change materially. CONSOLIDATED RESULTS OF OPERATIONS Note on comparisons For the first half of the year, EPCOR owned or controlled all of the power generation assets and related operations, including Power LP, that were sold to Capital Power in early July. Accordingly, net income, results of operations and variances for the first half of the year include all the power generation assets, results of operations and variances presented on a consolidated basis. After the sale of the power generation business and related operations in early July, we no longer controlled those operations. Consequently, the third quarter results, and results going forward, no longer present the power generation business and related operations on a consolidated basis. Those line items and variances are, in effect, replaced by the interest in Capital Power reported on the equity basis. In making year over year comparisons, variances include comparisons of power generation and related operations for the first half of 2009 to the first half of 2008, on an "apples to apples" basis. On the other hand, the third quarter of 2009 only reflects the equity interest in Capital Power while the third quarter in 2008 reflects the power generation business while it was still consolidated. In this context, the results of operations are discussed below.
<<
Net income
-------------------------------------------------------------------------
(Unaudited, $ millions) Three Nine
months months
-------------------------------------------------------------------------
Net income for the periods ended September 30, 2008 $ 76 $ 160
Loss on sale of power generation business (115) (115)
Equity income from Capital Power in 2009 31 31
Interest revenue in 2009 on long-term receivable
from CPLP 14 14
Lower (higher) administration expenses, excluding
administration expenses related to the power
generation business 8 (11)
Gold Bar operating income in 2009 excluding
administration expenses 7 12
Higher water rates and sales volumes, net of
franchise fees 3 11
Fair value changes on notes exchanged for ABCP 3 10
Higher depreciation expenses, excluding depreciation
expenses related to the power generation business (1) (5)
Higher financing expenses (22) (11)
Increases (decreases) related to the power generation
business that was sold effective early July 2009 (56) 2
Other (4) -
-------------------------------------------------------------------------
Decrease in net income (132) (62)
-------------------------------------------------------------------------
Net (loss) income for the periods ended
September 30, 2009 $ (56) $ 98
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Results for the three and nine months ended September 30, 2009 were a net
loss of $56 million and net income of $98 million respectively, compared with
net income of $76 million and $160 million for the corresponding periods in
2008.
Further explanations of the primary year over year variances are as
follows:
- Loss on sale of the power generation business reflects the difference
between EPCOR's carrying amount of its investment in the power
generation business sold and the consideration received for the
business. This loss includes income tax related charges to recognize
unrealizable future income tax assets and direct expenses incurred in
connection with the sale.
- Administration expenses were lower in the third quarter of 2009
compared with the corresponding period in 2008 due to lower staffing
levels in corporate services due to the sale of the power generation
business. Administration expenses across all business segments
excluding Power LP, were higher in the first half of 2009 compared
with the first half of 2008 due to increased costs related to the
Reorganization.
- The Gold Bar operation was transferred to EPCOR from the City of
Edmonton on March 31, 2009 and contributed $7 million and $12 million
of operating income before administration expenses in the third
quarter and year-to-date, respectively.
- Water rates were higher in the three and nine months ended
September 30, 2009 compared with the corresponding periods in 2008
primarily due to increased rates under the performance-based rate
tariff (PBR) as approved by The City of Edmonton. Water sales volumes
were also higher due to drier weather conditions in the second and
third quarters of 2009 compared with the corresponding periods in
2008.
- In the first nine months of 2009, the fair value of the notes
exchanged for ABCP decreased $1 million due to lower short-term and
higher long-term market interest rates in the first quarter, mostly
offset in the second and third quarters by the effect of narrower
credit spreads, which are taken into account in calculating the fair
value of the notes. In the third quarter of 2009, the fair value
increased $1 million. In the three and nine months ended
September 30, 2008, the fair value of EPCOR's ABCP decreased
$2 million and $11 million, respectively.
- Depreciation expense was higher in the three and nine months ended
September 30, 2009 compared with the corresponding periods in 2008
due to regulated water and distribution and transmission asset
additions.
- Financing expenses were higher in the three months ended
September 30, 2009 compared with the corresponding period primarily
due to the write-off of issue costs for the syndicated and bilateral
credit facilities that were cancelled in July as a result of the
Reorganization, minimal capitalized interest recognized in the third
quarter of 2009 compared with the corresponding period in 2008,
higher interest expenses due to the addition of the Gold Bar facility
in 2009 and lower sinking fund earnings in 2009 compared with 2008.
The higher financing expenses in the nine months ended September 30,
2009 compared with the corresponding period in 2008 primarily were
due to the same factors that affected the quarters ended
September 30, 2008 and 2009 except that capitalized interest was
higher for the nine months ended September 30, 2009 compared with the
same period in 2008. The Company capitalized borrowing costs as part
of its capital construction projects and in the first half of 2009,
construction work-in-progress for Keephills 3 and the Clover Bar
Energy Centre was higher compared with the corresponding periods in
2008. No activity on these projects occurred in the third quarter of
2009 as these projects were sold to Capital Power as a result of the
Reorganization.
- Net income increases (decreases) related to the power generation
business reflect numerous differences in the first half of 2009 and
three months ended September 30, 2009 compared with the corresponding
periods in 2008 associated with the power generation business that
was sold at the beginning of the third quarter. The most significant
net income differences relate to unrealized fair value changes,
availability incentive income, maintenance expenses for Genesee
scheduled turnarounds in 2008, income from Power LP and
administration expenses. See Segment Results - Generation.
Revenues
-------------------------------------------------------------------------
(Unaudited, $ millions) Three Nine
months months
-------------------------------------------------------------------------
Revenues for the periods ended September 30, 2008 $ 954 $ 2,618
Gold Bar revenue in 2009 15 28
Interest revenue in 2009 on long-term receivable
from CPLP 14 14
Higher water rates and sales volumes 3 11
Lower Water Services' commercial and transportation
services activity (22) (10)
Lower regulated rate tariff (RRT) electricity revenues (35) (76)
Revenue decreases prior to the sale of the power
generation business - (22)
Sale of power generation business in early July 2009 (581) (581)
Other 2 (2)
-------------------------------------------------------------------------
Decrease in revenues (604) (638)
-------------------------------------------------------------------------
Revenues for the periods ended September 30, 2009 $ 350 $ 1,980
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated revenues were lower for the three and nine months ended
September 30, 2009 compared with the corresponding periods in 2008 due to the
net impact of the following and should be read in conjunction with the Note on
comparisons:
- Water Services' commercial and transportation services revenues were
lower in the three and nine months ended September 30, 2009 compared
with the corresponding periods in 2008 primarily due to reduced
commercial water plant and distribution system construction activity
in 2009, partly offset by increased construction activity for street
lighting, signals and light rail transit overhead wires for the City
of Edmonton in 2009.
- Regulated electricity revenues were lower in the three and nine
months ended September 30, 2009 compared with the corresponding
periods in 2008 primarily due to lower electricity prices in 2009
compared with 2008.
- Revenue decreases related to the power generation business reflect
numerous differences in the first half of 2009 compared with the
corresponding period in 2008 associated with the power generation
business that was sold effective July 1, 2009. The most significant
revenue differences relate to trading activities in the Western U.S.,
natural gas sales, unrealized fair value changes and availability
incentive revenue.
- Sale of the power generation business reflects the revenues of this
business in the third quarter of 2008. The largest revenue items
related to that quarter were for Power LP, unrealized fair value
changes, natural gas sales and Alberta electricity sales.
Capital spending and investment
-------------------------------------------------------------------------
(Unaudited, $ millions)
Nine months ended September 30 2009 2008
-------------------------------------------------------------------------
Generation $ 228 $ 306
Distribution and Transmission 56 94
Energy Services 7 5
Water Services 64 50
Corporate - other 14 10
-------------------------------------------------------------------------
$ 369 $ 465
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Capital expenditures for property, plant and equipment were lower for the nine months ended September 30, 2009 compared with the corresponding period in 2008 primarily due to capital spending on Keephills 3 and Clover Bar Energy Centre in the third quarter of 2008, capital expenditures in 2008 for the Downtown Edmonton Supply and Substation project in Distribution and Transmission which was completed in the third quarter of 2008 and for the E.L. Smith water treatment plant upgrade in Water Services which was completed in the second quarter of 2008. These decreases in spending were partly offset by capital expenditures on the Gold Bar plant in 2009. There was no capital spending for the Generation segment and lower capital spending in the Energy Services segment in the third quarter of 2009 compared with the corresponding period in 2008 due to the sale of the power generation business.
<<
SEGMENT RESULTS
Generation
-------------------------------------------------------------------------
Generation results (including
intersegment transactions) Three months ended Nine months ended
(Unaudited, $ millions) September 30 September 30
-------------------------------------------------------------------------
2009 2008 2009 2008
Revenues $ - $ 257 $ 515 $ 712
Expenses - 367 428 617
-------------------------------------------------------------------------
Operating income (loss) $ - $ (110) $ 87 $ 95
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited, $ millions) Three Nine
months months
-------------------------------------------------------------------------
Operating income (loss) for the periods ended
September 30, 2008 $ (110) $ 95
Sale of power generation business in early July 2009 110 110
Increases/(decreases) prior to the sale of the
power generation business in early July 2009:
---------------------------------------------
Higher Genesee Power Purchase Arrangement (PPA)
availability incentive income - 42
Maintenance expenses for Genesee scheduled
turnarounds in 2008 - 26
Lower realized foreign exchange expense - 8
Gain on sale of portfolio investments in 2008 - (4)
Unrealized fair value changes on derivative
instruments - (5)
Higher administration expenses - (18)
Lower Power LP operating income - (160)
Other - (7)
-------------------------------------------------------------------------
Increase (decrease) in operating income 110 (8)
-------------------------------------------------------------------------
Operating income for the periods ended
September 30, 2009 $ - $ 87
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Generation's operating income for the three and nine months ended
September 30, 2009 increased $110 million and decreased $8 million,
respectively, compared with the corresponding periods in 2008. Further
information on the year-over-year changes is as follows and should be read in
conjunction with the Note on comparisons:
- Sale of the power generation business variance reflects the sale of
substantially all of the generation segment as part of the
Reorganization. The operating income for this segment for the three
months ended September 30, 2008 reflected that EPCOR still controlled
the generation operations, including Power LP, and reflected
unrealized losses on the change in fair value of natural gas
contracts and unrealized losses on the translation of Power LP's U.S.
dollar debt due to a strengthening U.S. Dollar in the third quarter
of 2008.
- Generation's revenues and operating income increased $42 million in
the first half of 2009 due to availability incentive income earned
under the terms of the Genesee 1 and 2 PPA compared with a net
availability penalty in the corresponding period in 2008. There were
scheduled turnarounds for required maintenance at Genesee 1 in the
first quarter of 2008 and at all three Genesee units in the second
quarter of 2008 whereas plant availability at Genesee 1 and 2 was
above plan in the first two quarters of 2009. The back-to-back timing
of the maintenance turnarounds in 2008 was required to accommodate
the Alberta Electric System Operator's upgrade of the new high-
voltage transmission lines in the Genesee and Keephills area.
- Foreign exchange gains were realized in the first half of 2009 on the
settlement of forward foreign exchange contracts used to economically
hedge the foreign exchange risk associated with anticipated purchases
of equipment for Clover Bar Energy Centre and Keephills 3 whereas
losses were realized on these contracts in the corresponding period
in 2008.
- The unrealized changes in the fair value of the forward foreign
exchange contracts for equipment purchases for Clover Bar Energy
Centre and Keephills 3 were losses in the first half of 2009 due to a
weakening U.S. Dollar compared with gains in the corresponding period
in 2008 due to a strengthening U.S. dollar. This unfavourable
variance was partly offset by a smaller decrease in the fair value of
the Joffre contract-for-differences due to a smaller decrease in the
forward spark spread in the first half of 2009 compared with the
first half of 2008. Spark spread is the theoretical difference
between the price of electricity as the output and its energy cost of
production.
- Administration expenses increased in the six months ended June 30,
2009 compared with the corresponding period in 2008 due to costs for
the Reorganization and increased spending on business development
activities and on the Genesee Integrated Gasification Combined Cycle
and Carbon Capture Sequestration technology project.
- Power LP contributed $22 million in the first six months of 2009
compared with $182 million in the corresponding period in 2008. The
year-over-year decreases include unrealized changes of $175 million
in the fair value of natural gas supply and foreign exchange
contracts for the six month period.
The decreases in operating income were partly offset by foreign
exchange losses recognized in 2008. In the fourth quarter of 2008,
Power LP re-evaluated the functional currency of its U.S.
subsidiaries and determined it to be U.S. dollars rather than
Canadian dollars. Accordingly, gains and losses on foreign currency
translation are recorded in other comprehensive income commencing in
the fourth quarter of 2008. Power LP reported net foreign exchange
losses of $11 million in the first half of 2008.
Power LP's revenues increased $29 million for the first half of 2009
compared with the corresponding periods in the prior year, primarily
due to unrealized changes in the fair value of forward foreign
exchange contracts for U.S. dollars used to economically hedge
operating cash flows. Year-over-year changes in plant revenues were
insignificant as the revenue from the Morris operation in 2009 was
offset by lower revenue from the California plants due to lower
electricity prices which, under the terms of the PPA, were driven by
lower natural gas prices.
Power LP's expenses increased $189 million in the first half of 2009
compared with the corresponding period in the prior year. The year-
over-year increase included unrealized changes in the fair value of
natural gas supply contracts of $202 million for the six month
period. These unrealized fair value changes were included in fuel
expense and were due to decreases in the forward market prices for
natural gas in the first half of 2009 compared with increases in the
first half of 2008. Operating expenses for the Morris facility also
contributed to the increase in Power LP's expenses. These increases
were partly offset by the foreign exchange losses in the first half
of 2008 with no corresponding amounts included in net income in 2009,
and decreased fuel costs at the California plants due to lower
natural gas prices in the first half of 2009 compared with the first
half of 2008.
Distribution and Transmission
-------------------------------------------------------------------------
Distribution and Transmission
results (including intersegment
transactions) Three months ended Nine months ended
(Unaudited, $ millions) September 30 September 30
-------------------------------------------------------------------------
2009 2008 2009 2008
Revenues $ 60 $ 59 $ 179 $ 177
Expenses 46 45 147 145
-------------------------------------------------------------------------
Operating income $ 14 $ 14 $ 32 $ 32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were no material changes in Distribution and Transmission revenues,
expenses and operating income, for the three and nine months ended September
30, 2009 compared with the corresponding periods in 2008.
Energy Services
-------------------------------------------------------------------------
Energy Services results
(including intersegment
transactions) Three months ended Nine months ended
(Unaudited, $ millions) September 30 September 30
-------------------------------------------------------------------------
2009 2008 2009 2008
Revenues $ 213 $ 608 $ 1,183 $ 1,703
Expenses 204 532 1,082 1,621
-------------------------------------------------------------------------
Operating income (loss) $ 9 $ 76 $ 101 $ 82
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited, $ millions) Three Nine
months months
-------------------------------------------------------------------------
Operating income for the periods ended
September 30, 2008 $ 76 $ 82
Higher billing charge revenues in 2009 - 2
Administration related to ongoing EPCOR operations - (5)
Sale of power generation business in early July 2009 (71) (71)
Increases/(decreases) prior to the sale of the
power generation business in early July 2009:
---------------------------------------------
Unrealized fair value changes in derivative
instruments and natural gas inventory - 106
Higher natural gas margins - 6
Higher administration expenses - (7)
Lower Alberta electricity margins - (19)
Other 4 7
-------------------------------------------------------------------------
(Decrease) increase in operating income (67) 19
-------------------------------------------------------------------------
Operating income for the periods ended
September 30, 2009 $ 9 $ 101
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Energy Services' operating income decreased $67 million for the quarter
and increased $19 million for the nine months ended September 30, 2009
compared with the corresponding periods in 2008 due to the net impact of the
following and should be read in conjunction with the Note on comparisons:
- Billing charge revenues were higher in 2009 compared with 2008
primarily due to higher rates as approved by the Alberta Utilities
Commission. These revenues reflect the recovery of administrative
costs from RRT customers for the provision of customer billing
services.
- The decreases due to the sale of the power generation business
reflect the sale of a significant portion of the Energy Services
segment as part of the Reorganization. The operating income for this
portion of the segment for the three months ended September 30, 2008
reflected EPCOR in control of the generation operations, including
Power LP, and reflected positive margins for Alberta electricity,
natural gas, trading activities in Ontario and the north eastern U.S.
and unrealized fair value gains due to a net short position combined
with decreasing forward electricity prices. These favourable results
were partly offset by an unrealized fair value loss on natural gas
inventory due to decreasing forward natural gas prices.
- The unrealized fair value changes for the first half of 2009 compared
with the first half of 2008 relate primarily to a net short position
in both years for derivative electricity contracts that were not
designated as hedges for accounting purposes. In the first half of
2009, forward Alberta power prices decreased which increased the fair
value of these contracts whereas in the corresponding period of 2008,
forward Alberta power prices increased which reduced the fair value
of these contracts. These unrealized fair value changes increased
energy revenues and energy purchases by $137 million and $31 million
respectively, in the first half of 2009 compared with the first half
of 2008. As a result of the sale of the power generation business the
Company is no longer exposed to fair value adjustments related to
energy contracts or natural gas inventory.
- Natural gas margins in the first half of 2009 compared with the first
half of 2008 were higher primarily due to gains realized on sales of
storage gas in the first half of 2009 compared with losses in the
first half of 2008 and increased margins from our speculative natural
gas portfolio. Natural gas revenues and purchases decreased
$165 million and $171 million respectively, in the first half of 2009
compared with the corresponding period in 2008 primarily due to lower
physical natural gas trading activities, lower natural gas
consumption due to fewer wholesale and merchant customers and lower
natural gas prices.
- Administration expenses increased in the six months ended June 30,
2009 compared with the corresponding period in 2008 primarily due to
costs incurred for the Reorganization.
- In the first half of 2009, energy revenues and expenses from our
Alberta electricity portfolio decreased $53 million and $34 million
respectively, compared with the first half of 2008 due to the impact
of reduced Alberta power prices on the portfolio, our reduced
interest in the Battle River Power Syndicate Agreement (PSA), and
lower pricing and volumes for our RRT business. The portfolio was in
a net long position as we had more physical supply from our
generating stations and interests in the Battle River and Sundance
PPAs (acquired PPAs) than we had contracted to sell. The decrease in
power generation resulting from our reduced interest in the Battle
River PSA was partly offset by increased generation from Genesee 3.
The impact of lower revenues on the energy margins for our RRT
business was minimal.
- Decreased trading activities in the western U.S., north eastern U.S.
and Ontario in the first half of 2009 compared with the corresponding
period in 2008 reduced revenues by $47 million, but had minimal
impact on energy margins.
Water Services
-------------------------------------------------------------------------
Water Services results
(including intersegment
transactions) Three months ended Nine months ended
(Unaudited, $ millions) September 30 September 30
-------------------------------------------------------------------------
2009 2008 2009 2008
Revenues $ 94 $ 98 $ 253 $ 226
Expenses 67 76 200 178
-------------------------------------------------------------------------
Operating income $ 27 $ 22 $ 53 $ 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited, $ millions) Three Nine
months months
-------------------------------------------------------------------------
Operating income for the periods ended
September 30, 2008 $ 22 $ 48
Increased water rates and sales volumes, net
of franchise fees 3 11
Gold Bar operating income excluding administration
expenses in 2009 7 12
Higher administration expenses (8) (17)
Other 3 (1)
-------------------------------------------------------------------------
Increase in operating income 5 5
-------------------------------------------------------------------------
Operating income for the periods ended
September 30, 2009 $ 27 $ 53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Water Services' operating income increased $5 million in the third quarter
and first nine months of 2009 compared with the corresponding periods of the
prior year due to the net impact of the following:
- Revenues from water sales, net of franchise fees, were higher in the
three and nine months ended September 30, 2009 compared with the
corresponding periods in 2008, primarily due to increased rates
effective April 1, 2008 and April 1, 2009 under Water Services'
Performance Based Rate structure as approved by its regulator, The
City of Edmonton, and increased sales volumes due to drier weather
conditions in the second and third quarters of 2009.
- The Gold Bar operation, which was transferred from the City of
Edmonton on March 31, 2009, contributed $15 million in revenues and
$8 million in expenses in the third quarter.
- Administration expenses increased in the first nine months of 2009
due to costs related to the Reorganization and the Gold Bar
operation.
>>
Transportation and other commercial services revenues were $22 million and $10 million lower in the third quarter and nine months ended September 30, 2009 compared with the corresponding periods in 2008 primarily due to reduced construction activity as a result of completion of projects for the towns of Chestermere, Wetaskiwin, Taber and Canmore as well as Suncor Voyageur. The decrease in revenues, offset by equivalent decreases in construction expenses, had minimal impact on operating income. Revenues related to the construction and maintenance of street lighting, signals and light rail transit overhead wires for the City of Edmonton were higher in the third quarter and nine months ended September 30, 2009 compared with the corresponding periods in 2008 due to increased activity. This revenue increase was offset by increased labour and business development expenses. A higher incidence and cost of water distribution main breaks in the nine months ended September 30, 2009 compared with the corresponding period in 2008 also contributed to higher expenses in Water Services.
<<
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
September December Increase
($ millions) 30, 2009 31, 2008 (decrease) Explanation
-------------------------------------------------------------------------
Cash and cash $ 22 $ 111 $ (89) Refer to liquidity and
equivalents capital resources
section.
-------------------------------------------------------------------------
Accounts receivable 243 503 (260) Sale of the power
(including income generation business
taxes recoverable) partly offset by
receivables related to
Gold Bar sales.
-------------------------------------------------------------------------
Current portion 254 6 248 Reflects current
of long-term portion of the long-
receivables term receivable from
CPLP and the
reclassification of a
commercial water loan
receivable from long-
term.
-------------------------------------------------------------------------
Derivative - 130 (130) Sale of the power
instruments generation business.
assets (current)
-------------------------------------------------------------------------
Other current assets 28 96 (68) Sale of the power
generation business,
2008 balance primarily
reflects generation
plant inventories.
-------------------------------------------------------------------------
Property, plant 1,725 4,639 (2,914) Sale of the power
and equipment generation business and
depreciation and
amortization expenses
in the current year,
offset by 2009 capital
additions and Gold Bar
assets.
-------------------------------------------------------------------------
Power purchase - 550 (550) Sale of the power
arrangements (PPAs) generation business.
-------------------------------------------------------------------------
Contract and 110 296 (186) Sale of the power
customer rights generation business and
and other amortization of RRT
intangible assets customer rights.
-------------------------------------------------------------------------
Long-term 1,472 - 1,472 Reflects the Company's
investment 72.2% equity interest
in CPLP received on
sale of power
generation business.
-------------------------------------------------------------------------
Derivative - 75 (75) Sale of the power
instruments generation business.
assets
(non-current)
-------------------------------------------------------------------------
Future income 30 103 (73) Sale of the power
tax assets generation business.
(non-current)
-------------------------------------------------------------------------
Goodwill 2 161 (159) Sale of the power
generation business.
-------------------------------------------------------------------------
Long-term 643 102 541 Reflects long-term
receivables portion of the long-
term receivable from
CPLP established on the
sale of the power
generation business.
-------------------------------------------------------------------------
Other assets 75 133 (58) Sale of the power
generation business.
-------------------------------------------------------------------------
Assets held - 43 (43) Decrease due to the
for sale sale of the power
generation business.
2008 balance reflects
the portion of the
Battle River PSA held
for sale.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September December Increase
($ millions) 30, 2009 31, 2008 (decrease) Explanation
-------------------------------------------------------------------------
Short-term debt $ 19 $ 140 $(121) Repayment of bankers'
acceptances and
commercial paper
-------------------------------------------------------------------------
Accounts payable 289 587 (298) Sale of the power
and accrued generation business
liabilities partly offset by the
current portion of the
transfer fee payable to
the City of Edmonton
for the Gold Bar
transfer.
-------------------------------------------------------------------------
Derivative - 131 (131) Sale of the power
instruments generation business.
liabilities
(current)
-------------------------------------------------------------------------
Other current 17 58 (41) Sale of the power
liabilities generation business.
-------------------------------------------------------------------------
Long-term debt 1,734 2,728 (994) Sale of power
(including generation business
current portion) including the long-term
debt outstanding of
EPCOR Power LP.
-------------------------------------------------------------------------
Derivative - 110 (110) Sale of the power
instruments generation business.
liabilities
(non-current)
-------------------------------------------------------------------------
Other non-current 85 125 (40) Sale of the power
liabilities generation business
partly offset by the
non-current portion of
the transfer fee owing
to the City of Edmonton
for the Gold Bar asset
transfer.
-------------------------------------------------------------------------
Future income - 100 (100) Sale of the power
tax liabilities generation business.
(non-current)
-------------------------------------------------------------------------
Non-controlling - 540 (540) Balance decreased due
interests to the sale of the
power generation
business and
recognition of interest
in Power LP on an
equity basis included
in equity interest of
CPLP.
-------------------------------------------------------------------------
Shareholder's 2,460 2,429 31 Reflects net income,
equity other comprehensive
income and the Gold Bar
asset capital
contribution partly
offset by common share
dividends.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
Cash inflows (outflows)
-------------------------------------------------------------------------
Three months
ended
September 30
---------------- Increase
($ millions) 2009 2008 (decrease) Explanation
-------------------------------------------------------------------------
Operating $ 65 $ 139 $ (74) Lower cash receipts in
2009 due to the sale of
the power generation
business, partly offset
by the receipt of
interest revenue on the
long-term receivable
from CPLP.
Investing 439 (165) 604 Proceeds on the
disposal of the power
generation business in
2009 and lower payments
for capital
expenditures in 2009.
Financing (563) 45 (608) Net financing outlays
in 2009 included the
repayment of
$468 million in
commercial paper and
banker's acceptances as
well as ongoing debt
repayments. Net
financing receipts in
2008 included the
issuance of
$113 million of
commercial paper and
bankers' acceptances
partly offset by
ongoing long-term debt
repayments.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash inflows (outflows)
-------------------------------------------------------------------------
Nine months
ended
September 30
---------------- Increase
($ millions) 2009 2008 (decrease) Explanation
-------------------------------------------------------------------------
Operating $ 316 $ 278 $ 38 Receipt of interest
revenue on the long-
term receivable from
CPLP in 2009 and
payment in 2008 of
income taxes related to
the 2006 gain on sale
of the Battle River
PSA. These cash
increases are partly
offset by reduced cash
receipts as a result of
the
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