EDMONTON, ALBERTA -- (Marketwired) -- 11/07/13 -- EPCOR Utilities Inc. (EPCOR) today filed its quarterly results for the three month and year-to-date periods ended September 30, 2013.
"EPCOR's core water and wires operations performed well in the third quarter of 2013. Much of our focus in June and early July was on our southern Alberta operations which were affected by flooding. Thanks to the efforts of our people, water service was restored quickly and the overall impact to the customers and communities we serve was kept to a minimum," said David Stevens, EPCOR President and CEO.
Highlights of EPCOR's financial performance are as follows:
-- Net income was $50 million on revenues of $515 million for the three
months ended September 30, 2013 compared with $63 million on revenues of
$512 million for the corresponding period in the previous year.
-- Net income was $152 million on revenues of $1,437 million for the nine
months ended September 30, 2013 compared with $87 million on revenues of
$1,436 million for the corresponding period in the previous year.
-- Net cash flows from operating activities for the nine months ended
September 30, 2013 were $150 million compared with $241 million for the
corresponding period in the previous year.
-- Investment in capital projects for the three months ended September 30,
2013 was $130 million compared with $97 million for the corresponding
period in the previous year.
-- Investment in capital projects for the nine months ended September 30,
2013 was $309 million compared with $220 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 (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 60 employer. EPCOR's website address is www.epcor.com.
EPCOR Utilities Inc. Interim Management's Discussion and Analysis September 30, 2013 ----------------------------------------------------------------------------
This management's discussion and analysis (MD&A) dated November 7, 2013, should be read in conjunction with the condensed consolidated interim financial statements of EPCOR Utilities Inc. and its subsidiaries for the three and nine months ended September 30, 2013 and 2012, the consolidated financial statements and MD&A for the year ended December 31, 2012 and the cautionary statement regarding forward-looking information on pages 13 and 14 of this MD&A. In this MD&A, any reference to "the Company", "EPCOR", "it", "its", "we", "our" or "us", except where otherwise noted or the context otherwise indicates, means EPCOR Utilities Inc., together with its subsidiaries. In this MD&A, Capital Power refers to Capital Power Corporation and its directly and indirectly owned subsidiaries including Capital Power L.P., except where otherwise noted or the context otherwise indicates. Financial information in this MD&A is based on the condensed consolidated interim financial statements, which were prepared in accordance with International Financial Reporting Standards (IFRS), and is presented in Canadian dollars unless otherwise specified. In accordance with its terms of reference, the Audit Committee of the Company's Board of Directors reviews the contents of the MD&A and recommends its approval by the Board of Directors. This MD&A was approved and authorized for issue by the Board of Directors on November 7, 2013.
OVERVIEW
EPCOR is wholly-owned by The City of Edmonton (the City). EPCOR builds, owns and operates electrical transmission and distribution networks in Canada as well as water and wastewater treatment facilities and infrastructure in Canada and the United States (U.S.). EPCOR also provides electricity and water services and products to residential and commercial customers. EPCOR's electricity (collectively the Distribution and Transmission and Energy Services segments) and water (including wastewater treatment) businesses consist primarily of rate-regulated and long-term commercial contracted operations. EPCOR's continuous improvement objective is to maximize the efficiency of its electricity and water operations.
EPCOR's net income was $50 million and $152 million, respectively, for the three and nine months ended September 30, 2013 compared with net income of $63 million and $87 million, respectively, for the comparative periods in 2012.
EPCOR's core operations performed well in the third quarter without any significant issues or disruptions to customers. Several of the southern Alberta municipalities in which EPCOR operates experienced flooding in the latter half of June and early July. The impact on our operations was minimal. Income from core operations was $33 million and $112 million, respectively, for the three and nine months ended September 30, 2013, compared with $35 million and $87 million, respectively, for the comparative periods in 2012. Income from core operations is a non-IFRS financial measure; see Non-IFRS Financial Measure on pages 10 and 11 of this MD&A.
Our 2013 capital expenditure plan includes work continued from 2012 on several significant upgrade projects such as the annual water main renewal program to improve Edmonton's water distribution system, a new water laboratory and related office building, a project to replace the gaseous chlorine chemical system at the Rossdale water treatment plant with an on-site hypochlorite generation system, upgrades to a digester and pre-treatment and solids handling infrastructure project at the Gold Bar wastewater treatment facility (Gold Bar), an underground electricity distribution cable replacement and extension program, and, in partnership with Altalink, L.P., construction of the Heartland electricity transmission line. Our capital expenditure plan also includes various new capital projects. This plan is aimed towards better water management practices and improvement of electricity distribution and transmission infrastructure to replace aging infrastructure and meet the growing demand for electricity. Expenditures on certain distribution capital projects will be on hold until the Company receives a decision from the Alberta Utilities Commission on its 2013 capital tracker application discussed in further detail under Outlook below.
CONSOLIDATED RESULTS OF OPERATIONS
Net Income
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Three Nine
(Unaudited, $ millions) months months
----------------------------------------------------------------------------
Net income for the periods ended September 30, 2012 $ 63 $ 87
Higher (lower) equity share of income from Capital Power
(after tax) (11) 4
No loss on sale of a portion investment in Capital Power
in 2013 - 36
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52 127
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Higher Water Services segment operating income 5 27
Lower Distribution and Transmission segment operating
income (9) (14)
Higher Energy Services segment operating income - 6
No foreign exchange loss in 2013 - 3
Other 2 3
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Increase (decrease) in income from core operations (2) 25
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Net income for the periods ended September 30, 2013 $ 50 $ 152
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Net income was lower for the three months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to the net impact of the following:
-- EPCOR's equity share of income of Capital Power was lower for the three
months ended September 30, 2013 compared with the corresponding period
in 2012 reflective of the Company's equity share of lower Capital Power
net income.
-- Changes in each business segment's operating results for the three
months ended September 30, 2013 compared with the corresponding period
in 2012 as described under Segment Results below.
Net income was higher for the nine months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to the net impact of the following:
-- EPCOR's equity share of income of Capital Power was higher for the nine
months ended September 30, 2013 compared with the corresponding period
in 2012 reflective of the Company's equity share of higher Capital Power
net income, partially offset by the impact of EPCOR's reduced economic
interest in Capital Power as a result of the Company's sale of a portion
of its investment in Capital Power in April 2012.
-- The Company incurred a loss on the sale of a portion of its investment
in Capital Power in April 2012 with no similar loss incurred to
September 30, 2013.
-- Changes in each business segment's operating results for the nine months
ended September 30, 2013 compared with the corresponding period in 2012
as described under Segment Results below.
-- The Company incurred a loss on the settlement of foreign exchange
contracts in the first quarter of 2012 with no similar loss incurred in
2013.
Revenues
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Three Nine
(Unaudited, $ millions) months months
----------------------------------------------------------------------------
Revenues for the periods ended September 30, 2012 $ 512 $ 1,436
Higher Water Services revenues 12 52
Higher (lower) Distribution and Transmission revenues (3) 12
Lower Energy Services revenues (10) (69)
Other 4 6
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Increase in revenues from core operations 3 1
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Revenues for the periods ended September 30, 2013 $ 515 $ 1,437
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Consolidated revenues were higher by $3 million and $1 million for the three and nine months ended September 30, 2013, respectively, compared with the corresponding periods in 2012 primarily due to the net impact of the following:
- Water Services segment revenues were higher for the three and nine months ended September 30, 2013 compared with the corresponding periods in 2012 primarily due to higher approved customer rates, revenues from a new Canadian commercial water contract that started in the fourth quarter of 2012 and a change in mix of U.S. water sales volumes from lower customer rate tiers to higher customer rate tiers. - Distribution and Transmission segment revenues were lower for the three months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to lower transportation services revenues under an agreement with the City compared with the corresponding period in 2012. Distribution and Transmission segment revenues were higher for the nine months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to higher system access service revenues related to 2012 Alberta Electric System Operator flow-through charges that were prevented from being billed to customers in 2012 due to the electricity rate freeze which ended in the first of 2013 and higher transmission tariff revenue as a result of higher approved interim rates. Partially offsetting these increases were lower transportation services revenues under an agreement with the City for the corresponding period in 2012. - Energy Services segment revenues were lower for the three months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to lower electricity distribution and transmission flow- through charges billed to customers. Energy Services segment revenues were lower for the nine months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to lower electricity prices.
Capital Spending and Investment
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----------------------------------------------------------------------------
(Unaudited, $ millions)
Nine months ended September 30, 2013 2012
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Water Services $ 96 $ 71
Distribution and Transmission 205 141
Energy Services 4 3
Corporate 4 5
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309 220
Business acquisition - 460
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Total capital spending and investment $ 309 $ 680
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Total capital spending and investment was lower for the nine months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to the acquisition of the U.S. water businesses in 2012 with no similar acquisition in 2013, partially offset by higher capital expenditures for property, plant and equipment for the nine months ended September 30, 2013 compared to the corresponding period in 2012 primarily due to increased construction activity on the Heartland electricity transmission line, reflecting EPCOR's 50% share of the project.
The total cost to construct the Heartland transmission line, in partnership with AltaLink L.P., is now expected to be $450 million, an increase of $20 million from the $430 million disclosed in the second quarter of 2013. As a result, the Company now expects its share of 2013 capital expenditures on the project to be $123 million instead of $105 million as previously disclosed. EPCOR's 50% share of the increased total cost is expected to be $225 million. The increase in expected total cost of the Heartland transmission line primarily results from changes to scope of work and an extension of the construction schedule due to unfavorable weather conditions.
SEGMENT RESULTS
Water Services
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Three months
ended Nine months ended
September 30, September 30,
----------------- -----------------
(Unaudited, $ millions, including
intersegment transactions) 2013 2012 2013 2012
----------------------------------------------------------------------------
Revenues $ 143 $ 130 $ 392 $ 339
Expenses (96) (88) (285) (259)
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Operating income $ 47 $ 42 $ 107 $ 80
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Water Services' operating income increased by $5 million and $28 million for the three and nine months ended September 30, 2013, respectively, compared with the corresponding periods in 2012 primarily due to higher approved customer rates. In addition, operating income was higher for the nine months ended September 30, 2013 compared with the corresponding period in 2012 due to a provision recorded in the first quarter of 2012 related to a water rate complaint by an Edmonton regional water customer group with no similar provision recorded in 2013 and costs incurred in 2012 to integrate the U.S. water operations acquired on January 31, 2012 with no such costs incurred in 2013. Partially offsetting the increase for the nine months ended September 30, 2013 were higher chemical costs compared with the corresponding period in 2012 primarily due to higher precipitation in 2013 resulting in higher turbidity in the North Saskatchewan river compared with the corresponding periods in 2012.
Distribution and Transmission
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Three months
ended Nine months ended
September 30, September 30,
----------------- -----------------
(Unaudited, $ millions, including
intersegment transactions) 2013 2012 2013 2012
----------------------------------------------------------------------------
Revenues $ 135 $ 139 $ 394 $ 382
Expenses (123) (118) (342) (316)
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Operating income $ 12 $ 21 $ 52 $ 66
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Distribution and Transmission's operating income decreased $9 million for the three months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to higher transmission flow-through charges not yet approved to be billed to customers.
Distribution and Transmission's operating income decreased $14 million for the nine months ended September 30, 2013 compared with the corresponding period in 2012 primarily due to higher transmission flow-through charges not yet approved to be billed to customers. Partially offsetting the decrease was higher transmission tariff revenues related to 2012 Alberta Electric System Operator flow-through charges which were expensed as incurred in 2012 and not billed to customers until 2013 due to the electricity rate freeze which ended in the first quarter of 2013, as discussed above, and higher system access service revenues as a result of higher approved interim rates.
Energy Services
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----------------------------------------------------------------------------
Three months
ended Nine months ended
September 30, September 30,
----------------- -----------------
(Unaudited, $ millions, including
intersegment transactions) 2013 2012 2013 2012
----------------------------------------------------------------------------
Revenues $ 277 $ 289 $ 774 $ 845
Expenses (283) (295) (756) (833)
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Operating income $ (6) $ (6) $ 18 $ 12
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Energy Services' operating income increased by $6 million for the nine months ended September 30, 2013, compared with the corresponding period in 2012 primarily due to improved Energy Price Setting Plan margins and no contact center consolidation costs incurred in 2013 compared with the corresponding period in 2012. Partially offsetting these increases were lower favorable fair value adjustments related to financial electricity purchase contracts in 2013 compared to 2012.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
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(Unaudited, $ September December Increase Explanation of
millions) 30, 2013 31, 2012 (decrease) material changes
----------------------------------------------------------------------------
Cash and cash $ 74 $ 232 $ (158) Refer to liquidity
equivalents and capital
resources section.
----------------------------------------------------------------------------
Trade and other 368 359 9 Increase primarily
receivables due to year-over-
year increase in
customer water
volumes and customer
water and
electricity rates.
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Inventories 15 13 2
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Finance lease 122 125 (3) Decrease due to
receivables scheduled lease
payments received.
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Other financial 373 383 (10) Decrease primarily
assets due to
reclassification to
Trade and Other
Receivables of notes
due within the next
twelve months.
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Deferred tax assets 52 52 -
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Investment in Capital 631 621 10 Increase due to
Power equity share of
higher Capital Power
income, partially
offset by limited
partnership
distributions.
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Property, plant and 3,645 3,417 228 Increase primarily
equipment due to capital
expenditures,
partially offset by
depreciation
expense.
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Intangible assets 223 222 1
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Trade and other 267 303 (36) Decrease primarily
payables due to earlier
settlement of
electricity
purchases payable in
the period compared
to the end of 2012.
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Loans and borrowings 2,043 1,970 73 Increase primarily
(including current due to commercial
portion) paper issued finance
working capital
requirements in the
third quarter of
2013.
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Deferred revenue 774 762 12 Increase primarily
(including current due to foreign
portion) exchange rate
adjustments.
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Provisions (including 102 112 (10) Decrease primarily
current portion) due to lower
employee benefits
obligations.
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Derivative - 2 (2)
liabilities
----------------------------------------------------------------------------
Other liabilities 40 49 (9) Decrease primarily
(including current due to the scheduled
portion) Gold Bar asset
transfer fee payment
to the City in the
first quarter of
2013.
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Deferred tax 7 5 2
liabilities
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Equity attributable 2,270 2,221 49 Increase due to
to the Owner of the comprehensive
Company income, partially
offset by dividends
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
September 30, 2013 2012 (decrease) Explanation
----------------------------------------------------------------------------
Operating $ 45 $ 75 $ (30) Decrease primarily
reflects changes in
non-cash operating
working capital
resulting from an
increase in accounts
receivable and a
decrease in accounts
payable.
Investing (81) (54) (27) Decrease primarily
due to increased
capital expenditures
of property, plant
and equipment
compared to the
third quarter of
2012.
Financing 30 (42) 72 Increase primarily
reflects the
issuance of
commercial paper in
2013 where none was
issued in 2012.
Opening cash and 80 313 (233)
cash equivalents
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Closing cash and $ 74 $ 292 $ (218)
cash equivalents
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----------------------------------------------------------------------------
(Unaudited, $ millions)
Cash inflows (outflows)
----------------------------------------------------------------------------
Nine months ended Increase Explanation
September 30, 2013 2012 (decrease)
----------------------------------------------------------------------------
Operating $ 150 $ 241 $ (91) Decrease primarily
reflects changes in
non-cash operating
working capital
resulting from an
increase in accounts
receivable and a
decrease in accounts
payable, partially
offset by higher
funds from
operations.
Investing (263) (430) 167 Increase primarily
due to the net
effect of
acquisition of the
U.S. water
businesses in
January 2012 with no
corresponding
acquisition in 2013
and proceeds
received in April
2012 on sale of a
portion of
investment in
Capital Power with
no corresponding
proceeds in 2013.
Financing (45) 165 (210) Decrease primarily
reflects issuance of
$75 million in
commercial paper in
2013 compared to
$300 million of
long-term debt
issued in 2012.
Opening cash and 232 316 (84)
cash equivalents
----------------------------------------------------------------------------
Closing cash and $ 74 $ 292 $ (218)
cash equivalents
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LIQUIDITY AND CAPITAL RESOURCES
The Company has credit facilities, which are used principally for the purpose of backing our commercial paper program and providing letters of credit, as outlined below:
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Letters
(Unaudited, $ Banking of credit
millions) commercial and other
September 30, Total paper facility Net amounts
2013 Expiry facilities issued draws available
----------------------------------------------------------------------------
Committed
Syndicated bank
credit November
facility(1) 2015 $ 400 $ - $ 154 $ 246
Syndicated bank
credit facility November
Tranche A 2015 250 75 - 175
Syndicated bank
credit facility November
Tranche B 2017 250 - - 250
----------------------------------------------------------------------------
Total committed 900 75 154 671
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Uncommitted
Bank line of
credit No expiry 25 - - 25
Bank line of November
credit 2013 21 - - 21
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Total uncommitted 46 - - 46
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Total credit
facilities $ 946 $ 75 $ 154 $ 717
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(1) Restricted to letters of credit.
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Letters
Banking of credit
(Unaudited, $ commercial and other
millions) Total paper facility Net amounts
December 31, 2012 Expiry facilities issued draws available
----------------------------------------------------------------------------
Committed
Syndicated bank
credit November
facility(1) 2015 $ 400 $ - $ 139 $ 261
Syndicated bank
credit facility November
Tranche A 2015 250 - - 250
Syndicated bank
credit facility November
Tranche B 2017 250 - - 250
----------------------------------------------------------------------------
Total committed 900 - 139 761
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Uncommitted
Bank line of
credit No expiry 25 - - 25
Bank line of November
credit 2013 20 - - 20
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Total uncommitted 45 - - 45
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Total credit
facilities $ 945 $ - $ 139 $ 806
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(1) Restricted to letters of credit.
Letters of credit are issued to meet the credit requirements of electricity market participants and conditions of certain service agreements.
The Company has a Canadian base shelf prospectus under which it may raise up to $1 billion of debt with maturities of not less than one year. At September 30, 2013, the available amount remaining under this shelf prospectus was $700 million (December 31, 2012 - $700 million). The shelf prospectus expires in January 2014. The Company is presently preparing a new Canadian shelf prospectus that it expects to file in the fourth quarter of 2013.
The Company's working capital and contractual obligations for the remainder of 2013 will be funded from cash on hand, operating cash flows, limited partnership distributions from Capital Power, interest and principal payments related to the long-term receivable from Capital Power, and if necessary, commercial paper issuance, drawing upon existing credit facilities, public and private debt offerings or the sale of a portion of our interest in Capital Power.
$75 million of commercial paper was issued and outstanding at September 30, 2013 (December 31, 2012 - nil).
EPCOR is currently in compliance with all of its financial covenants as set out in its bank credit agreements and the financial covenants of its Canadian public medium-term notes and U.S. private-debt notes. Based on current financial covenant calculations, the Company has sufficient capacity to borrow to fund current and long-term requirements. Although the risk is low, breaching these covenants could potentially result in a revocation of EPCOR's credit facility causing a significant loss of access to liquidity.
If the economy were to deteriorate, particularly in Canada and the U.S., the Company's ability to renew credit facilities, arrange long-term financing for its capital expenditure programs and acquisitions, or refinance outstanding indebtedness when it matures could be adversely impacted and the Company may suffer a credit rating downgrade. We believe that these circumstances have a low probability of occurring, however, we continue to monitor EPCOR's capital programs and operating costs to minimize the risk that the Company becomes short of cash or unable to honor its obligations.
In July 2013, Standard & Poor's affirmed its BBB+ long-term corporate credit and senior unsecured debt ratings for EPCOR Utilities Inc. and revised its outlook to positive from stable.
CONTRACTUAL OBLIGATIONS
During the first nine months of 2013, there were no material changes to the Company's purchase obligations, including payments for the next five years and thereafter, other than an increase in financial electricity purchase contracts valued at $95 million at September 30, 2013 (December 31, 2012 - $52 million). The increase results from the amendment to the Company's Energy Price Setting Plan approved by Alberta Utilities Commission in August 2013, which among other things, extended the procurement purchasing window from 45 days to 120 days in advance of the customer consumption date.
For further information on the Company's contractual obligations, refer to the 2012 annual MD&A.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2013, the Company adopted accounting policies in accordance with the following new and amended accounting standards relevant to EPCOR:
IFRS 7 - Financial Instruments - Disclosures - Offsetting Financial Assets and Liabilities (Amendment) IFRS 10 - Consolidated Financial Statements IFRS 11 - Joint Arrangements (IFRS 11) IFRS 12 - Disclosure of Interests in Other Entities IFRS 13 - Fair Value Measurement (IFRS 13) IAS 1 - Presentation of Items of Other Comprehensive Income IAS 19 - Employee Benefits (Amendment) (IAS 19) IAS 28 - Investments in Associates and Joint Ventures (Amendment) IAS 34 - Interim Financial Reporting (Amendment) (IAS 34)
Of the new and amended accounting standards which became effective January 1, 2013, the following had an impact on the Company as a result of accounting policies adopted effective January 1, 2013:
IFRS 11 was issued to replace IAS 31 - Interest in Joint Ventures. The new standard classifies joint arrangements into two types, joint operations and joint ventures. The standard defines a joint operation as a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement and are required to recognize assets, liabilities, revenues and expenses in proportion to its interest in the joint arrangement. The standard defines a joint venture as a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement and are required to recognize and account for the investment in the joint arrangement using the equity method. The Company applied the new standard effective January 1, 2013 and classified its interest in the Heartland Transmission project as a joint operation. As a result, the Company's condensed consolidated interim financial statements for the periods ended September 30, 2013 and 2012, include EPCOR's relative share of the joint operation's assets, liabilities, revenue and expenses with items of a similar nature on a line-by-line basis. Unrealized gains and losses on transactions between EPCOR and the joint operation are eliminated to the extent of EPCOR's interest in the joint operation, and unrealized losses are eliminated only to the extent there is no evidence of impairment.
IFRS 13 replaced the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements. The Company does not expect the standard to have a material impact on the annual financial statements. However, IAS 34 was amended as a result of IFRS 13, to require financial instrument fair value disclosure in an entity's interim financial statements.
IAS 19 was amended to: (a) eliminate the option to defer the recognition of actuarial gains and losses associated with net defined benefit liabilities (assets); (b) require a new method of calculating finance costs on defined benefit plans whereby a single discount rate is applied to the net pension assets or obligations; and (c) enhance the disclosure requirements to provide better information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in these plans. In accordance with the transitional provisions of revised IAS 19, the Company applied the revised standard retrospectively commencing January 1, 2013 and recognized in retained earnings, $1 million of unrecognized actuarial gains related to 2012 and $6 million of unrecognized actuarial losses related to years prior to 2012, and in accumulated other comprehensive income, $8 million of remeasurement effects related to years prior to 2013. In addition, the Company increased non-current provisions by $13 million.
CRITICAL ACCOUNTING ESTIMATES
In preparing the condensed consolidated interim financial statements, management necessarily made estimates in determining transaction amounts and financial statement balances. The following are the items for which significant estimates were made in the condensed consolidated interim financial statements: electricity revenues and costs, unbilled consumption of electricity and water, fair values, allowance for doubtful accounts, useful lives of assets and income taxes. Interim results will fluctuate due to the seasonal demands for electricity and water, changes in electricity prices, and the timing and recognition of regulatory decisions. Consequently, interim results are not necessarily indicative of annual results.
For further information on the Company's other critical accounting estimates, refer to the 2012 annual consolidated financial statements and 2012 annual MD&A.
NON-IFRS FINANCIAL MEASURE
Management uses income from core operations to distinguish operating results from the Company's core water and electricity businesses from results with respect to its investment in Capital Power. It is a non-IFRS financial measure, which does not have any standardized meaning prescribed by IFRS and is unlikely to be comparable to similar measures published by other entities. However, it is presented since it provides a useful measure of the Company's primary operations and it is referred to by debt holders and other interested parties in evaluating the Company's financial position and in assessing its creditworthiness.
A reconciliation of income from core operations to net income is as follows:
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Three months
ended Nine months ended
September 30, September 30,
---------------- ------------------
(Unaudited, $ millions) 2013 2012 2013 2012
----------------------------------------------------------------------------
Income from core operations $ 33 $ 35 $ 112 $ 87
Loss on sale of a portion of investment
in Capital Power - - - (36)
Equity income (loss) from Capital Power 17 26 41 33
Income tax recovery (expense) related to
the above items - 2 (1) 3
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Net income $ 50 $ 63 $ 152 $ 87
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RISK MANAGEMENT
This section should be read in conjunction with the Risk Management section of the 2012 annual MD&A. EPCOR faces a number of risks including risks related to its investment in Capital Power, operational risks, political, legislative and regulatory risk, strategy execution risk, weather risk, financial liquidity risk, environment risk, electricity price and volume risk, project risk, availability of people, credit risk, health and safety risk, conflicts of interest, foreign exchange risk and general economic conditions and business environment risks. The Company employs active programs to manage these risks.
As part of ongoing risk management practices, the Company reviews current and proposed transactions to consider their impact on the risk profile of the Company. There have been no material changes to the risk profile or risk management strategies of EPCOR as described in the 2012 annual MD&A that have affected the condensed consolidated interim financial statements for the three and nine months ended September 30, 2013.
OUTLOOK
In October 2013, EPCOR sold 9.6 million common shares of Capital Power at an offering price of $21.00 per share for aggregate gross proceeds of $202 million. Following the completion of the offering, EPCOR indirectly owns approximately 19% of Capital Power. The proceeds from the October sale will be used to repay commercial paper indebtedness and for general corporate purposes. The Company will incur a net loss of $16 million after tax as a result of this transaction.
In 2013, the Company intends to focus on continued growth in water and electricity rate-regulated infrastructure in conjunction with further expansion of commercial water operations.
Demand for clean drinking water is expected to continue to increase as the population grows, and we anticipate increased requirements for better water management practices including watershed management and conservation. With municipal budgets under pressure, municipal governments are considering the opportunities presented by public-private partnerships. At the same time, the Alberta oil and gas industry continues to seek assistance with water treatment and management at sites where they operate. EPCOR will continue pursuing commercial water contract opportunities in Western Canada in 2013.
Approval of the Company's interim-to-final rate true-up application with respect to its 2012 electricity distribution general tariff rates was received in the third quarter of 2013. The true-up amounts will be billed to customers in the fourth quarter of 2013.
In April 2013, interim refundable rates under the new performance based regulation applicable to the Distribution and Transmission's electricity distribution business came into effect. The interim refundable rates allow Distribution and Transmission to include 60% of the capital applied for under the limited additional capital provisions of the performance based regulation (K-Factor). The K-Factor is an adjustment for revenues over and above the capital-related revenues funded under the performance based regulation formula related to capital projects meeting specific criteria outlined in the performance based regulation decision. A decision on the related joint utility hearing regarding the K-Factor is expected in the fourth quarter of 2013. The K-Factor hearing decision could have an impact on the final rates for 2013 with any resulting true-up of the difference between interim rates and final rates expected to occur in 2014.
The Alberta Electric System Operator has outlined significant capital development for Alberta's electricity transmission infrastructure and has received approval from the Alberta Utilities Commission to develop certain projects through a competitive bid process. The first project expected to go through the process is the proposed west Fort McMurray electricity transmission project. This would differ from the historic process whereby each transmission facility owner develops, owns and operates all transmission facilities within their designated service area. EPCOR now has the opportunity to bid on this project.
QUARTERLY RESULTS
---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited, $ millions) Quarters ended Revenues Net income (loss) ---------------------------------------------------------------------------- September 30, 2013 $ 515 $ 50 June 30, 2013 469 45 March 31, 2013 453 57 December 31, 2012 495 (69) September 30, 2012 512 63 June 30, 2012 424 (20) March 31, 2012 500 44 December 31, 2011 512 53 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Events for the past eight quarters compared to the same quarter of the prior year that have significantly impacted net income include:
-- 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
to the investment of 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.
-- September 30, 2012 third quarter results included increased income
primarily due to higher approved electricity distribution and water and
wastewater customer rates, higher electricity distribution sales
volumes, the addition of EPCOR Water Arizona Inc. and EPCOR Water New
Mexico Inc. operations, and slightly improved margins under the
Company's Energy Price Setting Plan, including any fair value adjustment
on the related financial electricity purchase contracts. This was
partially offset by lower billing charge income due to lower number of
sites, and lower income from our equity share of Capital Power.
-- June 30, 2012 second quarter results included a loss on sale of a
portion of our interest in Capital Power, lower income from our equity
share of Capital Power and decreased income in Energy Services primarily
due to reduction in the fair value of financial electricity purchase
contracts and losses on the sale of excess electricity purchases, fees
no longer earned as a result of the expiration of the Alberta Energy
Savings (AES) contract in November 2011 and costs related to the contact
center consolidation, partially offset by increased income in
Distribution and Transmission primarily due to increased volumes and
approved customer rates, increased income in Water Services primarily
due to the addition of EPCOR Water Arizona Inc. and EPCOR Water New
Mexico Inc. operations, increase in Edmonton water and wastewater
approved customer rates, decreased provision related to a regulatory
decision and lower chemical costs.
-- March 31, 2012 first quarter results included increased income in
Distribution and Transmission primarily due to increased rates,
increased income in Energy Services primarily due to positive fair value
adjustments on financial electricity purchase contracts, and higher
income from our equity share of Capital Power, partially offset by fees
no longer earned as a result of the expiration of the AES contract in
November 2011, costs related to the contact center consolidation and
losses on the sale of excess electricity purchased.
-- December 31, 2011 fourth quarter results included increased income in
Distribution and Transmission primarily due to increased rates, higher
income from our equity share of Capital Power and a lower loss on sale
of a portion of our interest in Capital Power, partially offset by
negative fair value adjustments on foreign exchange forward contracts
and integration expenses relating to the EPCOR Water Arizona Inc. and
EPCOR Water New Mexico Inc. acquisition.
Forward - looking information
Certain information in this MD&A is forward-looking within the meaning of Canadian securities laws as it relates to anticipated financial performance, events or strategies. When used in this context, words such as "will", "anticipate", "believe", "plan", "intend", "target", and "expect" or similar words suggest future outcomes.
The purpose of forward-looking information is to provide investors with management's assessment of future plans and possible outcomes and may not be appropriate for other purposes. Forward-looking information in this MD&A includes: (i) expectations regarding the Company's 2013 capital expenditure plan; (ii) sources of funding for 2013 working capital and contractual obligations; (iii) the Company's growth plans and expected future investment opportunities; (iv) expectations regarding demands for clean drinking water; (v) expectations regarding Alberta's electricity transmission infrastructure project opportunities; and (vi) expectations regarding future regulatory proceedings, decisions and filings and their potential impact on the Company.
These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments and other factors it believes are appropriate. The material factors and assumptions underlying this forward-looking information include, but are not limited to: (i) the operation of the Company's facilities; (ii) the Company's assessment of the markets and regulatory environments in which it operates; (iii) weather; (iv) availability and cost of labor and management resources; (v) performance of contractors and suppliers; (vi) availability and cost of financing; (vii) foreign exchange rates; (viii) management's analysis of applicable tax legislation; (ix) the currently applicable and proposed tax laws will not change and will be implemented; (x) counterparties will perform their obligations; (xi) expected interest rates and related credit spreads; (xii) ability to implement strategic initiatives which will yield the expected benefits; (xiii) the Company's assessment of capital markets; and (xiv) factors and assumptions in addition to the above related to the Company's equity interest in Capital Power.
Whether actual results, performance or achievements will conform to the Company's expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results and experience to differ materially from EPCOR's expectations. The primary risks and uncertainties relate to: (i) operation of the Company's facilities; (ii) unanticipated maintenance and other expenditures; (iii) electricity load settlement; (iv) regulatory and government decisions including changes to environmental, financial reporting and tax legislation; (v) weather and economic conditions; (vi) competitive pressures; (vii) construction; (viii) availability and cost of financing; (ix) foreign exchange; (x) availability of labor and management resources; (xi) performance of counterparties, partners, contractors and suppliers in fulfilling their obligations to the Company; (xii) availability and price of electricity; (xiii) customer consumption volumes of water and electricity; and (xiv) risks in addition to the above related to the Company's equity interest in Capital Power, including power plant availability and performance.
This MD&A updates previously issued forward-looking statements related to the construction of the Heartland transmission line to state that the total cost to construct the Heartland transmission line is now expected to be $450 million rather than $430 million with the Company expending $123 million on the project in 2013 rather than $105 million, as previously disclosed.
Readers are cautioned not to place undue reliance on forward-looking statements as actual results could differ materially from the plans, expectations, estimates or intentions expressed in the forward-looking statements. Except as required by law, EPCOR disclaims any intention and assumes no obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.
ADDITIONAL INFORMATION
Additional information relating to EPCOR including the Company's 2012 Annual Information Form is available on SEDAR at www.sedar.com.
Contacts:
Media Relations:
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
