EDMONTON, ALBERTA--(Marketwired - Nov. 7, 2014) - EPCOR Utilities Inc. (EPCOR) today filed its quarterly results for the three months and year-to-date periods ended September 30, 2014.
"EPCOR's core operations continued to perform well in the third quarter of 2014 due to the diligence of our employees." said David Stevens, EPCOR President & CEO.
During the quarter Standard and Poor's upgraded EPCOR's corporate credit and senior unsecured debt ratings from 'BBB+' to 'A-'. "The upgrade is recognition of EPCOR's progress in executing our long-term plan that is focused on making sound investments in low risk electricity distribution and transmission, and water and wastewater utility infrastructure."
Highlights of EPCOR's financial performance are as follows:
- Net income was $23 million on revenues of $506 million for the three months ended September 30, 2014 compared with $50 million on revenues of $515 million for the corresponding period in the previous year. The difference is due to lower Capital Power net income and EPCOR's reduced economic interest in Capital Power.
- Net income was $116 million on revenues of $1,405 million for the nine months ended September 30, 2014 compared with $152 million on revenues of $1,437 million for the corresponding period in the previous year. The difference is due to lower Capital Power net income and EPCOR's reduced economic interest in Capital Power.
- Net cash flows from operating activities were $237 million for the nine months ended September 30, 2014 compared with $150 million for the corresponding period in the previous year.
- Investment in capital projects was $111 million for the three months ended September 30, 2014 compared with $130 million for the corresponding period in the previous year.
- Investment in capital projects was $265 million for the nine months ended September 30, 2014 compared with $309 million for the corresponding period in the previous year. The decrease of $44 million was primarily due to lower expenditure on the Heartland Transmission Project which was substantially completed in December 2013.
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 (www.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 65 employer. EPCOR's website address is www.epcor.com.
| EPCOR Utilities Inc. |
| Interim Management's Discussion and Analysis |
| September 30, 2014 |
This management's discussion and analysis (MD&A) dated November 7, 2014, 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, 2014 and 2013, the consolidated financial statements and MD&A for the year ended December 31, 2013 and the cautionary statement regarding forward-looking information on page 12 and 13 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 November 7, 2014.
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 $23 million and $116 million, respectively, for the three and nine months ended September 30, 2014 compared with net income of $50 million and $152 million, respectively, for the comparative periods in 2013. The difference is due to lower Capital Power net income and EPCOR's reduced economic interest in Capital Power.
EPCOR's core operations performed well in the third quarter without any significant issues or disruptions to customers. Net income from core operations was $33 million and $115 million, respectively, for the three and nine months ended September 30, 2014, compared with $33 million and $112 million for the comparative periods in 2013. Income from core operations is a non-IFRS financial measure; see Non-IFRS Financial Measure on page 10 of this MD&A.
Our 2014 capital expenditure plan includes 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, upgrades to a digester and pre-treatment tanks and solids handling infrastructure at the Gold Bar wastewater treatment facility (Gold Bar), distribution system relocation work as a result of the City's Light Rail Transit expansion, an underground electricity distribution cable replacement and extension program, the Genesee Interface to High Voltage Direct Current Converter Station project which is part of Altalink's West Alberta Transmission Line project, and the completion of work associated with the Heartland Transmission Project. The Heartland Transmission Project has been partitioned between Altalink L.P. and EPCOR effective October 1, 2014. Our capital expenditure plan also includes new capital placement such as a lagoon treatment project at Gold Bar, construction of new reservoirs and water system upgrades at the White Rock water treatment facility and various annual recurring projects, such as the underground residential distribution servicing project to meet continuing customer growth in the city of Edmonton. This plan is aimed towards better water management practices and improvement of electricity distribution and transmission infrastructure by replacing aging assets and meeting growing demand for electricity.
In May 2014, an EPCOR led consortium won a bid to design, build, finance, operate and maintain a new wastewater treatment facility for the City of Regina under a public-private partnership. The contract was signed July 3, 2014. In August 2014, EPCOR took over operations of the existing wastewater treatment plant in Regina. Construction on the new plant has commenced and is expected to be substantially completed by December 2016. The agreement includes operation of the new and existing facilities for a term of 30 years. Undiscounted cash flows from this project are estimated to be $444 million.
CONSOLIDATED RESULTS OF OPERATIONS
Revenues
| (Unaudited, $ millions) | Three months |
Nine months |
||||
| Revenues for the periods ended September 30, 2013 | $ | 515 | $ | 1,437 | ||
| Higher Water Services segment revenues | 28 | 38 | ||||
| Higher electricity Distribution and Transmission segment revenues | 6 | 1 | ||||
| Lower Energy Services segment revenues | (44 | ) | (78 | ) | ||
| Other | 1 | 7 | ||||
| Decrease in revenues from core operations | (9 | ) | (32 | ) | ||
| Revenues for the periods ended September 30, 2014 | $ | 506 | $ | 1,405 | ||
Consolidated revenues were lower by $9 million and $32 million for the three and nine months ended September 30, 2014, respectively, compared with the corresponding periods in 2013 primarily due to the net impact of the following:
- Water Services segment revenues were higher for the three and nine months ended September 30, 2014, compared with the corresponding periods in 2013 primarily due to higher approved customer rates and increased volumes, and higher construction revenue, partially offset by lower commercial services activity.
- Electricity Distribution and Transmission revenues were higher for the three and nine months ended September 30, 2014, compared with the corresponding periods in 2013 primarily due to higher approved distribution and transmission customer rates, partially offset by refunds to customers. The refunds in 2014 relate to the 2012 and first quarter of 2013 interim-to-final true-ups of system access rates.
- Energy Services segment revenues were lower for the three and nine months ended September 30, 2014, compared with the corresponding periods in 2013 primarily due to lower electricity prices and volumes.
Net Income
(Unaudited, $ millions) |
Three months |
Nine months |
||||
| Net income for the periods ended September 30, 2013 | $ | 50 | $ | 152 | ||
| 2013 equity share of income from Capital Power (net of income tax) | (17 | ) | (40 | ) | ||
| 2013 income from core operations | 33 | 112 | ||||
| Higher Water Services segment operating income | 4 | 14 | ||||
| Higher (lower) Distribution and Transmission segment operating income | 2 | (5 | ) | |||
| Higher (lower) Energy Services segment operating income | (1 | ) | 5 | |||
| Other | (5 | ) | (11 | ) | ||
| Increase in income from core operations | - | 3 | ||||
| 2014 income from core operations | 33 | 115 | ||||
| 2014 equity share of income (loss) from Capital Power (net of income tax) | (10 | ) | 1 | |||
| Net income for the periods ended September 30, 2014 | $ | 23 | $ | 116 | ||
Net income was lower for the three and nine months ended September 30, 2014 compared with the corresponding periods in 2013 primarily due to the net impact of the following:
- EPCOR's equity share of income of Capital Power was lower for the three and nine months ended September 30, 2014, compared with the corresponding periods in 2013 reflective of the Company's equity share of lower Capital Power net income and the impact of EPCOR's reduced economic interest in Capital Power.
- Changes in each business segment's operating results for the three and nine months ended September 30, 2014, compared with the corresponding periods in 2013 as described under Segment Results below.
- Net financing expense, included in Other, was higher for the three and nine months ended September 30, 2014, compared with corresponding periods in 2013 primarily due to lower capitalized interest resulting from less capital project work and a loss due to the fair value adjustment on the interest rate swap.
SEGMENT RESULTS
Water Services
| Three months ended September 30, |
Nine months ended September 30, |
||||||||||||
| (Unaudited, $ millions, including intersegment transactions) | 2014 | 2013 | 2014 | 2013 | |||||||||
| Revenues | $ | 171 | $ | 143 | $ | 430 | $ | 392 | |||||
| Expenses | (120 | ) | (96 | ) | (309 | ) | (285 | ) | |||||
| Operating income | $ | 51 | $ | 47 | $ | 121 | $ | 107 | |||||
Water Services' operating income increased by $4 million and $14 million for the three and nine months ended September 30, 2014, respectively, compared with the corresponding periods in 2013 primarily due to higher approved customer rates and increased volumes.
Distribution and Transmission
| Three months ended September 30, |
Nine months ended September 30, |
||||||||||||
| (Unaudited, $ millions, including intersegment transactions) | 2014 | 2013 | 2014 | 2013 | |||||||||
| Revenues | $ | 141 | $ | 135 | $ | 395 | $ | 394 | |||||
| Expenses | (127 | ) | (123 | ) | (348 | ) | (342 | ) | |||||
| Operating income | $ | 14 | $ | 12 | $ | 47 | $ | 52 | |||||
Distribution and Transmission's operating income increased by $2 million for the three months ended September 30, 2014, compared with the corresponding period in 2013 primarily due to higher approved customer rates. This was partially offset by refunds to customers in 2014 which relate to the 2012 and first quarter of 2013 interim-to-final true-ups of system access rates.
Operating income decreased by $5 million for the nine months ended September 30, 2014, compared with the corresponding period in 2013 primarily due to refunds to customers in 2014 which relate to the 2012 and first quarter of 2013 interim-to-final true-ups of system access rates. Also, there was a refund from the Alberta Electric System Operator in 2013 with no comparable refund in 2014. This was partially offset by higher approved customer rates.
Energy Services
| Three months ended September 30, |
Nine months ended September 30, |
||||||||||||
| (Unaudited, $ millions, including intersegment transactions) | 2014 | 2013 | 2014 | 2013 | |||||||||
| Revenues | $ | 233 | $ | 277 | $ | 696 | $ | 774 | |||||
| Expenses | (240 | ) | (283 | ) | (673 | ) | (756 | ) | |||||
| Operating income | $ | (7 | ) | $ | (6 | ) | $ | 23 | $ | 18 | |||
Energy Services' operating income decreased by $1 million for the three months ended September 30, 2014, compared with the corresponding period in 2013 primarily due to higher administrative and staff costs.
Energy Services' operating income increased by $5 million for the nine months ended September 30, 2014, compared with the corresponding period in 2013 primarily due to higher favorable fair value adjustments related to financial electricity purchase contracts, partially offset by lower billing charge revenues.
In March 2014, EPCOR completed its restructuring 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.
In May 2014, the Company launched Encor to provide competitive electricity and natural gas products.
Capital Spending and Investment
| (Unaudited, $ millions) | ||||
| Nine months ended September 30, | 2014 | 2013 | ||
| Water Services | $ | 121 | $ | 96 |
| Distribution and Transmission | 138 | 205 | ||
| Energy Services | 2 | 4 | ||
| Corporate | 4 | 4 | ||
| Total capital spending and investment | $ | 265 | $ | 309 |
Total capital spending and investment was lower for the nine months ended September 30, 2014, compared with the corresponding period in 2013 primarily due to the decreased construction activity in the Distribution and Transmission segment on the Heartland Transmission Project, reflecting EPCOR's 50% share of the project. This was partially offset by increased construction activity in the Water Services segment at the Rossdale water treatment and Gold Bar wastewater treatment plants, and increased water main realignments.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
| (Unaudited, $ millions) | September 30, 2014 | December 31, 2013 | Increase (decrease) |
Explanation of material changes |
||||
| Cash and cash equivalents | $ | 41 | $ | 130 | $ | (89 | ) | Refer to liquidity and capital resources section. |
| Trade and other receivables | 305 | 360 | (55 | ) | Decrease primarily due to higher collections from customers and lower electricity accruals and billings resulting from lower customer electricity volumes and rates. | |||
| Derivative assets | 4 | - | 4 | Increase due to spread between market electricity price and contract value, partially offset by cash settlements. | ||||
| Inventories | 15 | 14 | 1 | |||||
| Finance lease receivables | 119 | 122 | (3 | ) | Decrease due to scheduled collection of finance leases. | |||
| Other financial assets | 388 | 367 | 21 | Increase due to higher unbilled construction receivables, partially offset by collection of long-term receivables. | ||||
| Deferred tax assets | 53 | 53 | - | |||||
| Investment in Capital Power | 368 | 385 | (17 | ) | Decrease primarily due to limited partnership distributions and equity share of other comprehensive loss, partially offset by equity share of Capital Power income. | |||
| Property, plant and equipment | 3,978 | 3,776 | 202 | Increase primarily due to capital expenditures, partially offset by depreciation expense. | ||||
| Intangible assets | 242 | 240 | 2 | Increase primarily due to capital expenditures partially offset by amortization expense on assets with finite lives. | ||||
| Trade and other payables | 233 | 245 | (12 | ) | Decrease primarily due to lower electricity purchase accruals resulting from lower volumes and prices, partially offset by higher contractor costs on construction projects and accruals on capital projects. | |||
| Loans and borrowings (including current portion) | 2,001 | 1,972 | 29 | Increase primarily due to higher short-term debt, partially offset by payment of Chaparral loan and City of Edmonton debentures. | ||||
| Deferred revenue (including current portion) | 827 | 806 | 21 | Increase primarily due to contributed assets received, partially offset by revenue recognized. | ||||
| Provisions (including current portion) | 105 | 109 | (4 | ) | Decrease primarily due to lower employee benefit obligations, partially offset by contributions from developers. | |||
| Derivative liabilities (including current portion) | 2 | 1 | 1 | Increase primarily due to interest rate swap. | ||||
| Other liabilities (including current portion) | 37 | 40 | (3 | ) | Decrease primarily due to the scheduled Gold Bar asset transfer fee payment to the City, partially offset by increase in water deposits. | |||
| Deferred tax liabilities | 21 | 12 | 9 | Increase due to reduction in tax losses carried forward and increases in other taxable temporary differences. | ||||
| Equity attributable to the Owner of the Company | 2,287 | 2,262 | 25 | Increase due to comprehensive income, partially offset by dividends paid. | ||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||
| (Unaudited, $ millions) Cash inflows (outflows) |
||||||||||
| Three months ended September 30, | 2014 | 2013 | Increase (decrease |
) | Explanation | |||||
| Operating | $ | 49 | $ | 45 | $ | 4 | Increase primarily reflects changes in non-cash operating working capital resulting from a decrease in accounts receivable and higher funds from operations. | |||
| Investing | (98 | ) | (81 | ) | (17 | ) | Decrease primarily due to changes in non-cash investing working capital and lower scheduled collections on long-term receivables, partially offset by lower capital expenditures primarily on the Heartland Transmission Project. | |||
| Financing | (11 | ) | 30 | (41 | ) | Decrease primarily due to lower debt issuance. | ||||
| Opening cash and cash equivalents | 101 | 80 | 21 | |||||||
| Closing cash and cash equivalents | $ | 41 | $ | 74 | $ | (33 | ) | |||
| (Unaudited, $ millions) Cash inflows (outflows) |
||||||||||
| Nine months ended September 30, | 2014 | 2013 | Increase (decrease |
) | Explanation | |||||
| Operating | $ | 237 | $ | 150 | $ | 87 | Increase primarily reflects changes in non-cash operating working capital resulting from a decrease in accounts receivable and higher funds from operations. | |||
| Investing | (235 | ) | (263 | ) | 28 | Increase primarily due to lower capital expenditures on the Heartland Transmission Project partially offset by higher capital expenditures in Water Services, lower distributions received, changes in non-cash investing working capital and lower scheduled collections on long-term receivables. | ||||
| Financing | (91 | ) | (45 | ) | (46 | ) | Decrease primarily due to lower debt issuance. | |||
| Opening cash and cash equivalents | 130 | 232 | (102 | ) | ||||||
| Closing cash and cash equivalents | $ | 41 | $ | 74 | $ | (33 | ) | |||
LIQUIDITY AND CAPITAL RESOURCES
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:
| (Unaudited, $ millions) September 30, 2014 |
Expiry | Total facilities | Banking commercial paper issued | Letters of credit and other facility draws | Net amounts available | ||||
| Committed | |||||||||
| Syndicated bank credit facility1 | November 2016 | $ | 400 | $ | - | $ | 95 | $ | 305 |
| Syndicated bank credit facility Tranche A | November 2016 | 250 | 30 | - | 220 | ||||
| Syndicated bank credit facility Tranche B | November 2018 | 250 | - | - | 250 | ||||
| Total committed | 900 | 30 | 95 | 775 | |||||
| Uncommitted | |||||||||
| Bank line of credit | No expiry | 25 | - | - | 25 | ||||
| Bank line of credit | November 2014 | 22 | - | - | 22 | ||||
| Total uncommitted | 47 | - | - | 47 | |||||
| Total credit facilities | $ | 947 | $ | 30 | $ | 95 | $ | 822 | |
1 Restricted to letters of credit.
| (Unaudited, $ millions) December 31, 2013 |
Expiry | Total facilities | Banking commercial paper issued | Letters of credit and other facility draws | Net amounts available | |||||
| Committed | ||||||||||
| Syndicated bank credit facility1 | November 2016 | $ | 400 | $ | - | $ | 100 | $ | 300 | |
| Syndicated bank credit facility Tranche A | November 2016 | 250 | - | - | 250 | |||||
| Syndicated bank credit facility Tranche B | November 2018 | 250 | - | - | 250 | |||||
| Total committed | 900 | - | 100 | 800 | ||||||
| Uncommitted | ||||||||||
| Bank line of credit | No expiry | 25 | - | - | 25 | |||||
| Bank line of credit | November 2014 | 21 | - | - | 21 | |||||
| Total uncommitted | 46 | - | - | 46 | ||||||
| Total credit facilities | $ | 946 | $ | - | $ | 100 | $ | 846 | ||
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 September 30, 2014, the available amount remaining under this shelf prospectus was $1 billion (December 31, 2013 - $1 billion). The shelf prospectus expires in December 2015.
The Company's working capital and contractual obligations for the remainder of 2014 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. Cash flows from operating activities could be impaired by storm events that cause severe damage to our facilities and would require unplanned cash outlays for repairs for system restoration. Under those circumstances, more reliance would be placed on our credit facilities for working capital requirements until a regulatory approved recovery mechanism or insurance proceeds were in place.
$30 million of commercial paper was issued and outstanding at September 30, 2014 (December 31, 2013 - nil).
In September 2014, Standard & Poor's Rating Services raised its long-term corporate credit and senior unsecured debt ratings on EPCOR from 'BBB+' to 'A-'.
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 extend the maturity or revise the terms of the 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 and be unable to extend the maturity or revise the terms of its bank credit facilities or access the public or private debt markets. 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 pursuant to applicable agreements with Capital Power and as market conditions permit.
CONTRACTUAL OBLIGATIONS
During the third quarter of 2014, there were no material changes to the Company's purchase obligations, including payments for the next five years and thereafter except as noted below.
| (Unaudited, $ millions) | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 and thereafter | Total contractual cash outflows |
||||||||
| Interest rate swaps - net | $ | - | $ | - | $ | - | $ | 1 | $ | 1 | $ | - | $ | 2 | |
For further information on the Company's contractual obligations, refer to the 2013 annual MD&A.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2014, the Company adopted accounting policies in accordance with the following new and amended accounting standards relevant to EPCOR:
| IFRS 10 - Consolidated Financial Statements (Amendment) |
| IFRS 12 - Disclosure of Interests in Other Entities (Amendment) |
| IAS 32 - Financial Instruments: Presentation (Amendment) |
| IAS 36 - Impairment of Assets (Amendment) |
| IAS 39 - Financial Instruments: Recognition and Measurement (Amendment) |
| IFRIC 21 - Levies |
There was no significant impact on the Company as a result of accounting policies adopted.
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. 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 2013 annual consolidated financial statements and 2013 annual MD&A.
NON-IFRS FINANCIAL MEASURE
We use 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.
RISK MANAGEMENT
This section should be read in conjunction with the Risk Management section of the 2013 annual MD&A. EPCOR faces a number of risks including risk related to its investment in Capital Power, operational risks, political and legislative risk, 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, information technology related security risks, conflicts of interest, foreign exchange risk, 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 2013 annual MD&A that have affected the condensed consolidated interim financial statements for the three and nine months ended September 30, 2014.
In May 2014, the Company entered into interest rate swaps to manage its interest rate risk related to the Regina Wastewater project. The counterparty to the swap arrangements is a major Canadian financial institution. The swaps will be net cash settled on a monthly basis. The Company does not anticipate any material adverse effect on its financial covenants resulting from its involvement in this swap arrangement, nor does it anticipate non-performance by the counterparty. Detailed information regarding the interest rate swaps can be found in note 4 of the Company's 2014 third quarter condensed consolidated interim financial statements.
OUTLOOK
In 2014, we intend to continue to focus on growth in rate-regulated water and electricity infrastructure. We expect this growth to come from new infrastructure and operational improvements in both rate-regulated water and electricity businesses. 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. With municipal budgets under pressure, municipal governments are considering the opportunities presented by public-private partnerships. We will pursue expansion of our portfolio of commercial water contracts.
QUARTERLY RESULTS
| (Unaudited, $ millions) Quarters ended |
Revenues | Net income (loss) | |||
| 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 | |||
| March 31, 2013 | 453 | 57 | |||
| December 31, 2012 | 495 | (68 | ) | ||
Events for the past eight quarters compared to the same quarter of the prior year that have significantly impacted net income include:
- 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 lower 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 customer water rates, higher electricity system access service revenues, 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.
- March 31, 2013 first quarter results included increased income primarily due to higher approved water rates, a refund from the Alberta Electric System Operator for the true-up of 2011 transmission flow-through charges, and lower losses on selling excess electricity purchased, partially offset by lower income from our equity share of Capital Power and lower favorable fair value adjustments on financial electricity purchase contracts.
- December 31, 2012 fourth quarter results included an impairment charge related to the investment in Capital Power, lower income from our equity share of Capital Power, lower water sales, increased staff and employee benefit costs, partially offset by positive fair value adjustments on financial electricity purchase contracts.
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:
| Forward-looking Information | Material Factors or Assumptions | Risk Factors | ||
| The Company expects to have sufficient liquidity to finance its plans and fund its obligations in 2014. | EPCOR is able to generate the expected cash flow from operations and various means of funding remain available to the Company. | EPCOR's operations do not generate the expected level of cash flow and / or circumstances arise limiting or restricting the Company's ability to access funds through the various means otherwise available. | ||
| EPCOR plans to eventually sell all or a substantial portion of its ownership interest in Capital Power. | EPCOR is able to find suitable lower-risk businesses and / or assets to invest the sell-down proceeds in. Market conditions permit the sale of Capital Power shares at a price suitable to EPCOR. |
EPCOR is unsuccessful in finding suitable businesses and / or assets to invest in, therefore negating further sell downs to raise funds. The market price of 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. |
There are no updates to previously disclosed forward-looking information.
There are presently no differences between actual results and future-oriented-financial information previously disclosed.
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) the Company's assessment of the economy, markets and regulatory environments in which it operates; (ii) operation of the Company's facilities; (iii) availability and price of electricity; (iv) regulatory and government decisions including changes to environmental, financial reporting and tax legislation; (v) weather conditions; (vi) competitive pressures; (vii) construction; (viii) availability and cost of financing; (ix) foreign exchange; (x) availability and cost of labor and management resources; (xi) performance of counterparties, including but not limited to, contractors and suppliers in fulfilling their obligations to the Company; (xii) quality and sufficiency of water supply; (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.
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 2013 Annual Information Form is available on SEDAR at www.sedar.com.
Contact Information:
EPCOR Utilities Inc.
Tim le Riche
(780) 969-8238
tleriche@epcor.com
Corporate Relations:
EPCOR Utilities Inc.
Claudio Pucci
(780) 969-8245 or toll free (877) 969-8280
cpucci@epcor.com
www.epcor.com