EDMONTON, ALBERTA -- (Marketwired) -- 05/08/15 -- EPCOR Utilities Inc. (EPCOR) today filed its quarterly results for the period ended March 31, 2015.
"EPCOR had a good start to the year in our water, wastewater and electricity operations as demonstrated by our first quarter results," said David Stevens, EPCOR President & CEO.
Highlights of EPCOR's financial performance are as follows:
-- Net income was $69 million on revenues of $473 million for the three
months ended March 31, 2015 compared with $38 million on revenues of
$464 million for the corresponding period in the previous year. Net
income in the first quarter of 2015 was higher primarily due to higher
approved customer rates and higher favorable fair value adjustments
related to financial electricity purchase contracts.
-- Net cash flows from operating activities was $113 million for the three
months ended March 31, 2015 compared with $100 million for the
corresponding period in the previous year.
-- Investment in capital projects was $70 million for the three months
ended March 31, 2015 compared with $63 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 condensed consolidated interim financial statements are available on EPCOR's website (corp.epcor.com), and 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 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 70 employer. EPCOR's website address is www.epcor.com.
EPCOR Utilities Inc.
Interim Management's Discussion and Analysis
March 31, 2015
This management's discussion and analysis (MD&A) dated May 8, 2015, should be read in conjunction with the condensed consolidated interim financial statements of EPCOR Utilities Inc. for the three months ended March 31, 2015, and 2014, including significant accounting policies adopted (note 3), the consolidated financial statements and MD&A for the year ended December 31, 2014, including standards and interpretations not yet applied (note 3(x)), related party transactions (note 28) and financial instruments (note 29), and the cautionary statement regarding forward-looking information at the end 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 and joint arrangements. 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 May 8, 2015.
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 as well as 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 net income was $69 million for the three months ended March 31, 2015 compared with net income of $38 million for the comparative period in 2014. The increase of $31 million was primarily due to higher approved customer rates, higher favorable fair value adjustments related to financial electricity purchase contracts, higher equity share of income of Capital Power, and lower tax expensed due to the re-organization of Energy Services in 2014. This was partially offset by a loss on fair value adjustments related to interest rate swaps.
EPCOR's core operations performed well in the first quarter without any significant issues or disruptions to customers. The Company reported $26 million higher income from core operations in 2015 than in 2014, as described in the net income table on page 2. Income from core operations is a non-IFRS financial measure; see Non-IFRS Financial Measure on page 8 of this MD&A. EPCOR's equity share of income of Capital Power, net of income taxes, was $5 million higher for the three months ended March 31, 2015, than in 2014.
In February of 2015, Suncor gave the Company notice that it will exercise its contractual rights to buy back the leased assets and terminate the related financing and operating agreements. The transfer of assets and operations back to Suncor is to take place over an 18-month period unless the parties agree otherwise. This is not expected to have a material impact on the Company or its operations.
In April of 2015, David Stevens announced his retirement from EPCOR. David will remain in his position as the Board of Directors initiates the recruitment process for his replacement.
Consolidated results of operations Revenues ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, $ millions) ---------------------------------------------------------------------------- Revenues for the period ended March 31, 2014 $464 ---------------------------------------------------------------------------- Higher Water Services segment revenues 27 Higher electricity Distribution and Transmission segment revenues 14 Lower Energy Services segment revenues (29) Other (3) ---------------------------------------------------------------------------- Increase in revenues from core operations 9 ---------------------------------------------------------------------------- Revenues for the period ended March 31, 2015 $473 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Consolidated revenues were higher by $9 million for the three months ended March 31, 2015, compared with the corresponding period in 2014 primarily due to the net impact of the following:
-- Water Services segment revenues were higher for the three months ended
March 31, 2015, compared with the corresponding period in 2014 primarily
due to higher construction revenue and higher approved customer rates.
-- Electricity Distribution and Transmission segment revenues were higher
for the three months ended March 31, 2015, compared with the
corresponding period in 2014 primarily due to higher approved
electricity rates.
-- Energy Services segment revenues were lower for the three months ended
March 31, 2015, compared with the corresponding period in 2014 primarily
due to lower electricity prices and volumes.
Net Income
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(Unaudited, $ millions)
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Net income for the period ended March 31, 2014 $ 38
2014 equity share of income from Capital Power (net of income
tax) (9)
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2014 income from core operations 29
Higher Water Services segment operating income 2
Higher Distribution and Transmission segment operating income 12
Higher Energy Services segment operating income 11
Other 1
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26
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2015 income from core operations 55
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2015 equity share of income from Capital Power (net of income
tax) 14
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Net income for the period ended March 31, 2015 $ 69
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Net income was higher for the three months ended March 31, 2015, compared with the corresponding period in 2014 primarily due to the following:
-- EPCOR's equity share of income of Capital Power was higher for the three
months ended March 31, 2015, compared with the corresponding period in
2014 reflective of the Company's equity share of higher Capital Power
net income.
-- Changes in each business segment's operating results for the three
months ended March 31, 2015, compared with the corresponding period in
2014 as described under Segment Results below.
Segment results
Water Services
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(Unaudited, $ millions, including intersegment
transactions)
Three months ended March 31, 2015 2014
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Revenues $ 147 $ 120
Expenses (116) (91)
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Operating income $31 $29
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Water Services' operating income increased by $2 million for the three months ended March 31, 2015, compared with the corresponding period in 2014 primarily due to higher approved customer rates. This was partially offset by higher chemical costs due to early spring run-off conditions.
Distribution and Transmission ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, $ millions, including intersegment transactions) Three months ended March 31, 2015 2014 ---------------------------------------------------------------------------- Revenues $ 143 $ 129 Expenses (113) (111) ---------------------------------------------------------------------------- Operating income $30 $18 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Distribution and Transmission's operating income increased by $12 million for the three months ended March 31, 2015, compared with the corresponding period in 2014 primarily due to higher net system access collections and distribution access rates.
Energy Services ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, $ millions, including intersegment transactions) Three months ended March 31, 2015 2014 ---------------------------------------------------------------------------- Revenues $ 228 $ 257 Expenses (208) (248) ---------------------------------------------------------------------------- Operating income $20 $9 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Energy Services' operating income increased by $11 million for the three months ended March 31, 2015, compared with the corresponding period in 2014 primarily due to higher favorable fair value adjustments related to financial electricity purchase contracts.
In March 2014, EPCOR completed its reorganization of Energy Services. The services formerly offered directly by EPCOR Energy Alberta Inc. are now provided by EPCOR Energy Alberta Limited Partnership, through its general partner EPCOR Energy Alberta GP Inc.
Capital Spending and Investment ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, $ millions) Three months ended March 31, 2015 2014 ---------------------------------------------------------------------------- Water Services $ 27 $ 25 Distribution and Transmission 41 36 Energy Services - 1 Corporate 2 1 ---------------------------------------------------------------------------- Total capital spending and investment $70 $63 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Total capital spending and investment was higher for the three months ended March 31, 2015, compared with the corresponding period in 2014 primarily due to increased spending in the Distribution and Transmission segment on lifecycle replacement and growth projects, and increased construction activity in the Water Services segment at the Rossdale water treatment plant, Gold Bar wastewater treatment plant, and on the White Rock Total Water Quality Management project. This was partially offset by decreased construction activity in the Distribution and Transmission segment due to the Heartland Transmission Project being completed in 2014.
Consolidated statements of financial position
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(Unaudited, $
millions) March 31, December31, Increase Explanation of
2015 2014 (decrease) material changes
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Cash and cash Refer to
equivalents Consolidated
Statements of Cash
$ 40 $ 37 $ 3 Flows section.
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Trade and other Increase primarily
receivables due to an increase
in current portion
of finance lease
receivables due from
Suncor and other
financial assets
(see below),
partially offset by
lower electricity
accruals and
billings resulting
from lower
electricity volumes
474 333 141 and prices.
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Inventories 14 14 -
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Finance lease Decrease primarily
receivables due to re-
classifying non-
current lease
receivables to
current (recorded in
trade and other
receivables above)
resulting from the
Suncor buy back
92 118 (26) decision.
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Other financial Decrease due to
assets portion of CPC debt
and portion of
Regina receivable
becoming current
(recorded in trade
and other
receivables above),
partially offset by
higher construction
265 408 (143) revenue recognized.
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Deferred tax assets 69 69 -
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Investment in Increase due to
Capital Power equity share of
Capital Power
income, partially
offset by limited
partnership
408 393 15 distributions.
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Property, plant and Increase primarily
equipment due to capital
expenditures and
foreign currency
valuation
adjustments,
partially offset by
depreciation
4,221 4,112 109 expense.
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Intangible assets Increase primarily
and goodwill due to capital
expenditures,
partially offset by
amortization expense
on assets with
268 254 14 finite lives.
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Trade and other Decrease primarily
payables due to lower
electricity purchase
accruals as a result
of lower volumes and
220 248 (28) prices.
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Loans and borrowings Increase primarily
(including current due to foreign
portion) currency valuation
adjustments on US
2,111 2,080 31 debt.
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Deferred revenue Increase primarily
(including current due to contributed
portion) assets received and
favorable foreign
currency valuation
adjustments,
partially offset by
898 870 28 revenue recognized.
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Provisions Increase primarily
(including current due to contributions
portion) from developers,
partially offset by
lower employee
143 135 8 benefit obligations.
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Derivative Increase primarily
liabilities due to unrealized
(including current fair value loss on
portion) 12 9 3 interest rate swap.
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Other liabilities Decrease primarily
(including current due to decrease in
portion) 36 37 (1) customer deposits.
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Deferred tax Increase primarily
liabilities due to foreign
currency valuation
21 19 2 adjustments.
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Equity attributable Increase due to
to the Owner of comprehensive
theCompany income, partially
offset by dividends
2,410 2,340 70 paid.
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Consolidated statements of cash flows
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(Unaudited, $ millions)
Cash inflows (outflows)
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Three months ended Increase Explanation
March 31, 2015 2014 (decrease)
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Operating Increase primarily
reflects higher
funds from
operations,
partially offset by
lower non-cash
operating working
capital primarily
resulting from a
larger decrease in
$ 113 $ 100 $ 13 accounts payable.
Investing Decrease primarily
due to higher
advances on
financial lease
receivables and
other assets and
higher capital
expenditures,
partially offset by
lower non-cash
investing working
capital and lower
payments for Gold
(80) (68) (12) Bar transfer fees.
Financing Increase primarily
due to proceeds from
issuance of short-
term loans and
(30) (36) 6 borrowings.
Opening cash and
cash equivalents 37 130 (93)
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Closing cash and
cash equivalents $ 40 $ 126 $ (86)
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Liquidity and capital resources
The Company maintains its financial position through rate-regulated utility and contracted operations which generate stable cash flows.
Capital Requirements and Contractual Obligations
During the first quarter of 2015, there were no material changes to the Company's capital requirements or purchase obligations, including payments for the next five years and thereafter.
Financing
The Company has bank credit facilities, which are used principally for the purpose of backing the Company's commercial paper program and providing letters of credit, as outlined below:
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Letters
Banking of credit
(Unaudited, $ commercial and other Net
millions) Total paper facility amounts
March 31, 2015 Expiry facilities issued draws available
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Committed
Syndicated bank
credit
facility(1) December 2017 $ 200 $ - $ 63 $ 137
Syndicated bank
credit facility December 2019 350 109 - 241
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Total committed 550 109 63 378
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Uncommitted
Bank line of
credit No expiry 25 - - 25
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Total uncommitted 25 - - 25
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Total credit
facilities $ 575 $ 109 $ 63 $ 403
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(1) Restricted to letters of credit.
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Letters
Banking of credit
(Unaudited, $ commercial and other Net
millions) Total paper facility amounts
December 31, 2014 Expiry facilities issued draws available
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Committed
Syndicated bank
credit
facility(1) December 2017 $ 200 $ - $ 82 $ 118
Syndicated bank
credit facility December 2019 350 103 - 247
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Total committed 550 103 82 365
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Uncommitted
Bank line of
credit No expiry 25 - - 25
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Total uncommitted 25 - - 25
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Total credit
facilities $ 575 $ 103 $ 82 $ 390
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(1) Restricted to letters of credit.
Letters of credit are issued to meet the credit requirements of energy 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 March 31, 2015, the available amount remaining under this shelf prospectus was $1 billion (December 31, 2014 - $1 billion). The shelf prospectus expires in December 2015.
The Company expects to have sufficient liquidity to finance its plans and fund its obligations for the remainder of 2015 with a combination of cash on hand, cash flow from operating activities, sell down of our interest in Capital Power, the issuance of commercial paper and drawings upon existing credit facilities. The Company has an adequate contractual liquidity position with credit available under various bank lines as described under Financing. Cash flows from operating activities would be impaired by events that cause severe damage to our facilities and would require unplanned cash outlays for system restoration repairs. Under those circumstances, more reliance would be placed on our credit facilities for working capital requirements until a regulatory approved recovery mechanism was in place or insurance proceeds were received.
EPCOR plans to eventually sell all or a substantial portion of its remaining interest in Capital Power subject to market conditions, based on its requirements for capital and other circumstances that may arise in the future.
Commercial paper was issued and outstanding at March 31, 2015 for $109 million (December 31, 2014 - $103 million).
Financial Covenants
EPCOR is currently in compliance with all of its financial covenants in relation to its bank credit facilities, 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 in the longer term, particularly in Canada and the U.S., the Company's ability to extend the maturity or revise the terms of its bank credit facilities, arrange long-term financing for its capital expenditure programs and acquisitions, or refinance outstanding indebtedness when it matures could be adversely impacted. If market conditions worsen, the Company may suffer a credit rating downgrade. We believe that these circumstances have a low probability of occurring, however, we continue to monitor our capital programs and operating costs to minimize the risk that the Company becomes short of cash or unable to honor its obligations. If required, the Company would look to reduce capital expenditures and operating costs and / or sell a portion of its investment in Capital Power as market conditions permit.
For further information on the Company's contractual obligations, refer to the 2014 annual MD&A.
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 and income taxes. Although the current condition of the economy has not impacted our methods of estimating accounting values, it has impacted the inputs in those determinations and the resulting values. 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 2014 annual consolidated financial statements and 2014 annual MD&A.
Non-IFRS financial measure
We use income from core operations to distinguish operating results from the Company's 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 core 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.
Risk management
This section should be read in conjunction with the Risk Management section of the 2014 annual MD&A. EPCOR faces a number of risks including risk related to investment in Capital Power, operational risks, regulatory risk, political and legislative risk, electricity price and volume risk, strategy execution risk, health and safety risk, information technology related security risks, environment risk, project risk, weather risk, financial liquidity risk, availability of people, counterparty credit risk, foreign exchange risk, conflicts of interest, and general economic conditions, business environment and other 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 2014 annual MD&A that have affected the condensed consolidated interim financial statements for the three months ended March 31, 2015.
Outlook
In 2015, we intend to continue to focus on growth in rate-regulated water and electricity infrastructure. We expect this growth to come from new infrastructure to accommodate growth and operational improvements in both rate-regulated water and electricity businesses primarily related to the Edmonton based operations. We also intend to expand our water and electricity commercial services offerings.
Demand for water is expected to continue to increase and we anticipate increased requirements for better water management practices including watershed management and conservation. We will pursue expansion of our portfolio of commercial water contracts, particularly in Canada.
The Alberta Utilities Commission's (AUC) 2013 Generic Cost of Capital decision set the return on equity for 2013 through 2015 to 8.3% (previously 8.75%) for all Alberta natural gas and electricity distribution and transmission utilities. The true up for the difference in approved return will occur in 2015 and 2016. The AUC also reduced the equity portion of the capital structure by 1%, based on improved credit market conditions.
Subsequent Event
In April 2015, EPCOR exchanged 9,450,000 limited partnership units for an equal number of common shares of Capital Power which were immediately sold at an offering price of $23.85 per share for aggregate gross proceeds of $225 million. As a result of this transaction, the Company will recognize a net gain of $19 million after tax in net income in the second quarter. In addition, EPCOR exchanged all of its remaining 9,391,000 outstanding exchangeable limited partnership units for common shares of Capital Power. Following the completion of the offering, EPCOR directly owns 9% of Capital Power. As a result, the Company will reclassify and account for the investment in Capital Power as available for sale.
Quarterly results
---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, $ millions) Quarters ended Revenues Net income ---------------------------------------------------------------------------- March 31, 2015 $ 473 $ 69 December 31, 2014 499 75 September 30, 2014 506 23 June 30, 2014 435 55 March 31, 2014 464 38 December 31, 2013 492 23 September 30, 2013 515 50 June 30, 2013 469 45 ----------------------------------------------------------------------------
Events for the past eight quarters that have significantly impacted net income and cash flows and the comparability between quarters are:
-- March 31, 2015 first quarter results included higher approved water and
electricity customer rates, higher fair value adjustments on financial
electricity purchase contracts, higher equity share of income of Capital
Power, and lower income tax expense due to the re-organization of Energy
Services. This was partially offset by a loss on fair value adjustments
related to the interest rate swap.
-- December 31, 2014 fourth quarter results included higher approved water
and electricity customer rates, recovery of deferred income taxes due to
the recognition of loss carry forwards as a result from an increase in
forecasted taxable income in Energy Services, gain on dilution of
interest in Capital Power and higher income from our equity share of
Capital Power, partially offset by higher depreciation on capital assets
in service, lower fair value adjustments on interest rate swap and
financial electricity purchase contracts, and lower capitalized interest
due to lower capital spend during the period.
-- September 30, 2014 third quarter results included higher favorable fair
value adjustments on financial electricity purchase contracts and higher
approved water and electricity customer rates, partially offset by lower
income from our equity share of Capital Power.
-- June 30, 2014 second quarter results included higher favorable fair
value adjustments on financial electricity purchase contracts and higher
approved water and electricity customer rates, partially offset by lower
income from our equity share of Capital Power.
-- March 31, 2014 first quarter results included lower income from our
equity share of Capital Power and higher unfavorable fair value
adjustments on financial electricity purchase contracts, partially
offset by higher approved water and electricity rates.
-- December 31, 2013 fourth quarter results included increased income
primarily due to a lower impairment charge related to the investment in
Capital Power, higher income from our equity share of Capital Power and
increased income from higher approved water and electricity customer
rates, partially offset by a loss on sale of the partial investment in
Capital Power.
-- September 30, 2013 third quarter results included lower income primarily
due to higher transmission flow-through charges not yet approved to be
billed to customers and lower income from our equity share of Capital
Power, partially offset by increased income from higher approved water
customer rates.
-- June 30, 2013 second quarter results included increased income primarily
due to higher approved water rates, higher electricity system access
rates, higher transmission tariff revenues and higher income from our
equity share of Capital Power, partially offset by higher transmission
flow-through charges not yet approved to be billed to customers.
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.
Material forward-looking information within this MD&A, including related material factors or assumptions and risk factors, are noted in the table below:
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Forward-looking Material Factors or
Information Assumptions Risk Factors
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The Company expects to EPCOR is able to generate EPCOR's operations do not
have sufficient the expected cash flow generate the expected
liquidity to finance its from operations and level of cash flow and /
plans and fund its various means of funding or circumstances arise
obligations in 2015. remain available to the limiting or restricting
Company. the Company's ability to
access funds through the
various means otherwise
available.
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EPCOR plans to EPCOR is able to find EPCOR is unsuccessful in
eventually sell all or a suitable lower-risk finding suitable
substantial portion of businesses and / or businesses and / or
its ownership interest assets to invest the assets to invest in,
in Capital Power. sell-down proceeds in. therefore negating
further sell downs to
Market conditions permit raise funds.
the sale of Capital Power
shares at a price The market price of
suitable to EPCOR. Capital Power shares
declines to an amount
that EPCOR no longer
deems it feasible to sell
all or substantially all
of its interest in
Capital Power.
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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 to differ from expectations and are identified in the Risk Management section above.
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 2014 Annual Information Form is available on SEDAR at www.sedar.com.
Contacts:
Media Relations:
Tim le Riche
(780) 969-8238
tleriche@epcor.com
Corporate Relations:
Claudio Pucci
(780) 969-8245 or toll free (877) 969-8280
cpucci@epcor.com
