Investor Presentation - June 2015

EPCOR Utilities Inc.
Investor Presentation
June 2015
Gold Bar Wastewater Treatment Plant
Guy Bridgeman
Senior Vice President & Chief Financial Officer
Frank Mannarino
Senior Vice President Electricity Operations
Duane Sommerfeld
1
Treasurer
Forward-Looking Information
Certain information in this presentation and in oral answers to questions may contain forward-looking
information statements or forward-looking information together, “forward-looking information”. Forwardlooking information is based on current expectations, estimates and projections that involve a number of
risks which could cause actual results to vary and in some instances to differ materially from those
anticipated by EPCOR. Forward-looking information is based on the estimates and opinions of
management at the time the information is presented. Actual results could differ materially from conclusions,
forecasts or projections in the forward-looking information, and certain material factors or assumptions were
applied in drawing conclusions or making forecasts or projections as reflected in the forward-looking
information. Additional information about the material factors and risks that could cause actual results to
differ materially from the conclusions, forecasts or projections in the forward-looking information and the
material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection
as reflected in the forward-looking information is contained in the most recent interim and annual
Management Discussion and Analysis filed on SEDAR (www.sedar.com) and EPCOR’s website
(www.epcor.com).
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 assumes no obligation to update any forward-looking
information, should circumstances or management’s estimates or opinions change, or any other reason.
2
Contents
• EPCOR Overview
• Business Highlights
• Financial Overview
3
EPCOR Overview
4
EPCOR Overview
 Headquartered in Edmonton, predecessor company began operating in 1891. As of
December 31, 2014 employed 2,710 employees.
 Stand alone corporation as of Jan 1, 1996; sole shareholder is the City of Edmonton.
 EPCOR operates at arms length from the Shareholder with a fully independent Board of
Directors.
 EPCOR’s mandate is to operate on commercial terms and fund investments independently
without any reliance on its Shareholder for capital.
 Ownership stake of 9.1% in Capital Power; reduced from 72% in mid-2009 with intentions
to sell all or substantially all of the remaining interest over time depending on requirements
and market conditions.
 Public issuer of debt only. As a result, classified as a Venture Issuer.
 Stand alone credit rating is A- (S&P) and A (low) stable (DBRS) – no credit support from
the City.
 Further information on SEDAR.
5
EPCOR Operations
 We build, own and operate electrical transmission and distribution networks, water and
wastewater treatment facilities and infrastructure in Canada and the United States and
provide retail energy products in Alberta.
 We serve over 85 communities and industrial sites in Alberta, British Columbia and
Saskatchewan, and 22 communities and 7 counties in Arizona and New Mexico through
EPCOR Water USA.
6
Water Services Operations
Municipal Water and Wastewater
City of Edmonton
Municipal Water and Wastewater
Alberta/British Columbia/Saskatchewan/USA
Water Treatment & Distribution
Alberta
 Two large water treatment plants on the North Saskatchewan river –
capacity of 680 million liters/day.
 Operating contracts in Canmore, Chestermere, Okotoks, Red Deer
County, Taber.
 Approximately 265,000 fully metered, Edmonton water customers.
 Completed expansion and upgrade of Evan-Thomas water and
wastewater facility in August 2014.
 Rates regulated by City of Edmonton under a PBR covering 20122017.
British Columbia
 Water also sold to more than 65 surrounding communities under
wholesale rates regulated by the AUC.
 Regulated water utilities in White Rock and French Creek.
 Operating contract in Sooke.
Wastewater Treatment
Saskatchewan
 Enhanced Primary treatment – 1,200 million liters/day.
 Wastewater facility expansion and operating contract in Regina assumed operations and commenced construction in 2015.
 Rates regulated by City of Edmonton under PBR covering 2012-2017.
Arizona and New Mexico
 Regulated water utility – Chaparral City Water Company, EPCOR
Water Arizona, EPCOR Water New Mexico.
 Provide water and wastewater services to approximately 200,000
customer connections across 22 communities and seven counties.
Industrial Water and Wastewater
Alberta
 Own three water treatment and four wastewater treatment facilities at Suncor’s Fort McMurray Oil Sands operations under long-term contracts.
 Operate five water treatment and five wastewater treatment facilities at Suncor and Shell Albian Sands oil sands operations in Fort McMurray.
British Columbia
 Operate the Britannia Mine wastewater treatment facility.
7
Electricity Operations
Electricity Distribution and Transmission
Energy Services
 Distribute to approximately 370,000 sites within Edmonton with
high reliability.
 Approximately 5,400 km of distribution and 260 km of transmission
lines, both aerial and underground.
 Provide RRO (procurement, billing and customer care) for
approximately 600,000 Edmonton and Fortis Alberta energy
customers, regulated by the AUC.
 Provide billing and customer care for approximately 265,000
EPCOR water customers in Edmonton and City of Edmonton
drainage and waste collection services.
 51,000 poles with 11,500 aerial transformers and more than
19,400 underground transformer.
 Competitive Retail energy provider under Encor by EPCOR.
Provide procurement, billing and customer care services to Alberta
retail electricity customers under competitive contract.
 Own and operate 35 transmission and five distribution substations.
 Regulated by the Alberta Utilities Commission (AUC) – Distribution
(PBR) /Transmission (cost of service).
Technologies
 Provide design, construction and maintenance services for street lighting, traffic signals and Light Rail Transit systems in Edmonton,
Calgary and other municipalities.
8
Strategy
Continue to invest within EPCOR’s Risk Appetite
1. One Company
2. Two Principal Regions

We are open to new geographies
provided that we can establish operating
HUBs that can deliver excellence in
operations.
3. Three Lines of Business

Commercial Services can include Design,
Build, Finance and Operate contracts in
the wires, municipal water / wastewater,
industrial water / wastewater and
transportation sectors.
9
Strategic Direction


Continue to invest in regulated and contracted utility infrastructure

High quality investments consistent with low risk appetite

Maintain A- (S&P) and A (low) (DBRS) credit ratings

Sell remaining 9.1% investment in Capital Power over time
Continue to build reputation as a trusted developer and operator of utility assets.

Zero Injury Culture

Service Reliability

Environmental Responsibility

Regulatory Effectiveness
Legend
Electricity
COE & AB
Municipal Water
COE
Municipal Water
AB & BC & SK
Municipal Water
AZ
Industrial Water
COE & AB
10
Capital Prioritization

Building out our existing operating hubs through organic growth and through tuck-in
acquisitions remains our first priority.

Entering into new DBFO agreements with municipal and industrial clients continues to be
an area of increasing focus.

We will consider opportunities to acquire new utility operating HUBs on an opportunistic
basis where the opportunity fits within our risk appetite including return expectations.
•
Non-Discretionary Capital (sustaining + organic growth)
•
Utility Tuck-In Acquisitions
•
Design Build Finance Operate / P3 / Concession Projects
•
•
Municipal and Industrial Potable Water and Wastewater Treatment
•
Mine Runoff Water Treatment
•
Supply of Industrial Process Water / Re-use
•
Electrical Transmission and Transportation
Utility HUB Acquisition
11
Business Highlights
12
Water Canada – P3 Projects
Evan-Thomas Water and Wastewater Facility – P3
Project

Contract with Alberta Infrastructure to design, build,
partially finance and operate.

Construction completed in August 2014.

EPCOR will operate the expanded and upgraded
facility for 10 years.

Expansion and upgrade for total cost of $37.6
million.
Evan-Thomas plant commissioning
Regina Wastewater Treatment Plant – P3 Project

Wastewater Treatment Plant Expansion and
Upgrade contract by the City of Regina for total cost
of $158 million.

30 year design-build-finance-operate-maintain
contract – long term financing for $79 million.

Construction began in August 2014 - substantial
completion expected by December 2016.
Regina construction in progress
13
Water Canada – Selenium Removal
Coal mining industry is under pressure to
manage impact of releasing Selenium into
water resources.

Selenium is an element that is harmful to
fish – contained in water that flows from B.C.
to the U.S. - strong EPA pressure across the
U.S.

EPCOR has experience with removal of
heavy metals from the Britannia mine site.
Opportunity exists for EPCOR in the coal
sector.
14
Water USA Highlights
Strong Financial Performance
 Rate increases, increased sales in higher rate blocks and improved operational efficiency
contribute to strong financial performance.
 Improved regulatory environment that included early approval of wastewater treatment
asset into rate base and improved mechanism to ensure recovery of sustaining capital.
Follow-on tuck-in acquisitions according to longer-term plan
 Tuck-in acquisitions in 2013 (North Mohave Valley Corporation in Arizona and Thunder
Mountain Water Company in New Mexico).
 Acquisition of customer rights in 7,000-acre area wastewater and recycled water services
project along the Loop 303 Corridor within the City of Glendale, Arizona.
15
Distribution & Transmission Highlights
Strong and Stable Growth
 65 km double-circuit 500 kV $535 million transmission line connects the industrial
Heartland region to existing infrastructure in south Edmonton - in service December 2013.
 AUC approved the partition of the Heartland Transmission Line between EPCOR
and AltaLink in accordance with their respective service territories.
 Advanced Metering Infrastructure project beginning in 2015 with full implementation of
converting approximately 369,000 meters in 2016 & 2017.
Regulatory
 Increased comfort with PBR implementation for Distribution.
 Generic Cost of Capital decision - reduced equity thickness by 1% and allowed return
from dropped from 8.75% to 8.3%.
 Utility Asset Disposition appeal heard by the Alberta Court of Appeal on June 8 and 9,
2015 with a decision expected in second half of 2015.
16
Energy Services Highlights
Restructuring Approved
 February 2014 - AUC approved the corporate reorganization of the Energy Services
business.
 Significant cash tax savings through utilization of tax loss carry forwards.
Energy Price Setting Plan Amendment
 March 2015 - AUC approved the EPSP for 2014 to April 30, 2018.
 May 2015 - EPCOR filed a Review and Variance application for the lack of risk
compensation for procuring load.
17
Encor - Competitive Retail
 In May 2014 EPCOR re-entered the competitive retail
electricity and natural gas market under the Encor banner.
 Re-entry is a defensive strategy that:
 Mitigates loss of revenue from customers seeking
competitive contracts elsewhere.
 Ensures the retention of customer base, should the
RRO be discontinued in the future.
 Re-entry provides a means to enhance revenue and income
by capturing the gas side of the value chain.
 EPCOR is procuring all energy for this offering on a full loadfollowing basis – no commodity risk.
18
Financial Overview
19
2014 Year-end / 2015 Q1 Financial Results
Very strong 2014 financial results

Net Income from Core Operations (excluding Capital Power equity income, impairment
charges and gain/loss on disposition) was $168 million in 2014, matching the $168
million earned in 2013.

2014 Funds From Operations was $337 million, up from $326 million in 2013.
Continued strong operational performance in 2015

Excellent start in 2015 with Funds From Operations of $101 million in Q1, up 26% from
$80 million in 2014.

Net Income for Q1 up 82% to $69 million compared to the same period last year.

Completed sale of 9,450,000 Capital Power shares on April 2, 2015 with gross proceeds
of $214 million.
20
2014 – Financial Overview
Consolidated Revenue - $1,927 M
Consolidated Operating Income - $285 M
1%
8%
9%
30%
48%
55%
29%
21%
Consolidated EBITDA - $444 M
Consolidated Total Assets - $5,738 M
8%
3%
7%
3%
51%
53%
32%
1
6%
7%
All amounts in millions of CDN dollars, as of December 31, 2014
30%
21
Historical Operating Income
 The transformation of EPCOR that began in 2009 – by selling the power generation
business and re-investing in lower risk wires and water utility infrastructure - is well
underway.
 Operating income of water and wires businesses up 190% from 2009 to 2014.
$350
$330
Pre-split Level
$290
$285
$300
$252
$250
Generation
$203
$ Million
Corporate
$188
Energy Services
$200
Distribution & Transmission
Water Services
$150
$100
$50
$0
2009
2010
2011
2012
22
2013
2014
Interest in Capital Power
EPCOR plans to divest all or a significant portion of its interest in Capital Power over time
according to capital requirements and as market conditions permit.
EquityInterest
Interest
Equity
80%
Back-to-Back
Debt Debt
(B2B)
Back-to-Back
$896
72%
70%
$900
61%
$800
60%
50%
$ Million
$700
39%
40%
29%
30%
19%
20%
$600
$500
18%
$354
$340
$332
$300
9.1%
$200
$100
0%
2009

$379
$400
10%

$613
2010
2011
2012
2013
2014
2015
Q1
$2009

Sale of Capital Power LP units in 2010, 2011,
2012, 2013 and 2015.
 Approximately $1.09 billion in total gross
proceeds.
Dilution in 2011 and 2014 by Capital Power.

23
2010
2011
2012
2013
2014
Back-to-back debt owed to EPCOR by Capital
Power relates to generation assets transferred
to Capital Power LP in 2009.
Remainder to be repaid in full by June 2018.
 Significant re-payments: 2016 - $140
million; 2018 - $174 million.
Debt Maturities
$450
$400
EUI
EUI with B2B
$350
$ Millions
$300
$250
$200
$150
$100
$50
$0
24
EUI USD
Financing and Liquidity
 Syndicated bank credit facility of $350 million.
 Supporting $350 million commercial paper program.
 Current maturity date of December 2019.
 Committed letter of credit facility of $200 million to December 2017.
 Overall bank credit facilities reduced from prior levels ($500 million syndicate and $400
million letter of credit facility) to reduce cost and better align with liquidity requirements.
 Available medium-term note debt capacity of $1 billion under short-term base shelf
prospectus renewed to December 2015.
 Market tone is very constructive for additional EPCOR debt issuance.

Remaining 9.4 million shares in Capital Power, trading at $22/share are fully liquid after
June 30 as EPCOR is free to sell at its discretion without need for secondary offering.
25
Liquidity Metrics
Debt to Capitalization
45%
50%
40%
38%
44%
47%
47%
47%
41% 42%
40%
FFO to Debt
30%
20%
18%
10%
16%
16.7%
15.7%
15.3%
14%
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014
12%
13.1%
10.6%
10%
EBIT Interest Coverage1
8%
3.0
2.5
2.5
2.0
2.6
6%
2010
2.2
2.0
1.5
1.1
1.0
0.5
0.0
2010
1 As published on SEDAR.
2011
2012
2013
2014
26
2011
2012
2013
2014
Credit Profile
Credit Ratings
 S&P: A- ; stable outlook – Upgraded September 2014 from BBB+ due to strengthening
business risk profile.
 DBRS: A (low); stable outlook.
Strong Business Risk Profile
 Continue to reduce earnings volatility and overall business risk by selling down interest in
Capital Power.
 Emphasis on growth in rate-regulated businesses.
 Geographically diversified and multiple lines of business.
 Comprehensive management and governance focused on risk management.
Stable Financial Risk Profile
 Stable credit metrics with prudent pacing of capital expenditure program.
 Conservative financial management policies, attentive to maintaining adequate liquidity,
access to capital markets and prudent use of leverage in the context of business risk.
 Pursuit of growth at a reasonable price.
Improved Performance
 Expect to grow net income and cash flow from operations.
27
Financial Strategy and Profile
 Target adequate liquidity profile.
 Leverage employed to extent that cash flow adequately services debt commitments and is
sufficiently balanced to maintain current investment grade credit rating.
 Debt profile will be a blend of shorter and longer terms but maturities are generally aligned
with asset lives financed.
 In all cases, debt is sourced at lowest economic cost, considering interest rate refinance
risk, foreign exchange risks and hedge costs.
 Policies in place for foreign exchange and interest rate hedging.
 U.S. acquisitions / development to be funded from U.S. cash flow and $USD debt to hedge
foreign exchange exposure.
 As circumstances dictate, hybrid financing is considered.
 Dividend policy stipulates payments of $141 million until a change is recommended by the
Board and approved by the Shareholder.
28
Summary
 Transformation to a lower risk owner / operator of water and wires utility infrastructure
nearing completion.
 Investment in Capital Power below 10%.
 Credit upgrade by Standard & Poor’s.
 EPCOR Water USA acquisition continues to perform very well.
 Success on the project development front:
 Kananaskis – upgrade completed.
 Regina – awarded in May 2014 and construction well underway.
 Considerable industrial water and competitive P3 opportunities to place capital.

Solid 2015 YTD Results.
29
Thank you for your time
30