EPCOR Utilities Inc.

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EPCOR Utilities Inc.

10065 Jasper Avenue
Edmonton, Alberta T5J 3B1
Canada
Telephone: (780) 412-3414
Fax: (708) 412-3096
Web site: http://www.epcor.ca

Government-Owned Company
Incorporated: 1996
Employees: 2,600
Operating Revenues: $2.96 billion (2005)
NAIC: 221122 Electric Power Distribution

EPCOR Utilities Inc., a top Canadian provider of energy and energy-related services and products, is owned by the city of Edmonton. The operation serves three regions: Alberta; Ontario and the U.S. Northeast; and British Columbia and the U.S. Pacific Northwest. For the bulk of its history, EPCOR operated as a unit of the Canadian government. However, in the mid-1990s, coinciding with the trend toward electrical utility deregulation, EPCOR switched to a corporate structure. Guided by an independent board of directors, the entity has been lauded for its governance model as well as for its dependable operation.

EDMONTON'S INFRASTRUCTURE TAKING SHAPE: 1891 THROUGH THE 20TH CENTURY

EPCOR Utilities Inc. got its start in 1891. A group of entrepreneurs was granted a ten-year permit to build the Edmonton Electric Lighting and Power Company on the banks of the North Saskatchewan River. In 1902, ownership shifted to the municipality and another public utility began to take shape: a water distribution system. A water treatment plant followed a year later.

The infrastructure of the city continued to grow over the next few decades. The city, for example, saw its first traffic light, located at Jasper Avenue and 101 Street, in 1933, and downtown electric lines went underground in 1947. Pollution concerns forced the city to switch from coal-fired to gas boilers in 1955, an EPCOR company history recalled.

As the city grew during the 1960s so did demand for electrical power. Edmonton needed more capacity. Electrical distribution and power plant operations combined in 1970 to form Edmonton Power. A new generation station was commissioned that year and expanded over the decade.

Growth continued into the 1980s. The first Genesee unit began operating at full load in July 1989 and within a few years was Edmonton Power's top producer of electricity. A second Genesee unit commenced commercial operation in early 1994.

Meanwhile, change was in the air for the industry at large and for Edmonton Power. In 1993, David Richard Foy was persuaded by the chair of Edmonton Power to leave his position as president and CEO of Phillips Cables Limited in Toronto and direct the transformation of the company. A climate of deregulation opened the door for the utility to leave its bureaucratic structure behind for one driven by competition and innovation.

Edmonton Power, operating in the Alberta market; Aqualta, water supplier to the provincial capital region; and Eltec, a commercial electrical service operation, combined in 1996 to form EPCOR Utilities Inc. The merger was the first of its kind for Canada. A subsidiary of the city of Edmonton, EPCOR was overseen by an independent board of directors.

In 1995, the utility returned $90 million in dividends, revenue taxes, and service charges to the city, according to Commerce News. Revenues for the year totaled $462 million. The company posted record earnings for the year and ranked among Canada's most profitable companies. Between 1994 and 1995, net income climbed 26 percent from $74 million to $94 million.

A well-managed as well as profitable company, its rates were among the lowest in North America. Foy was set on turning EPCOR, with combined assets of $2.3 billion and sales approaching $1 billion, into a world class utility. Later in the decade, a new leader, Don Lowry, a longtime telecommunications executive, would arrive to advance the cause.

RESPONDING TO CHANGING MARKETS: 2000–2004

At the dawn of the 21st century, concern over global warming had begun to escalate as the world increasingly took note of events ranging from melting glaciers and increased numbers of catastrophic storms. The Kyoto agreement, which challenged the industrialized world to cut greenhouse emissions, spawned carbon credits trading among power generators. In 2000, EPCOR bought 50,000 tons of carbon credits—typically selling for $1 to $3 per tonne—from Fortum. The company owned a Finnish power plant that converted peat to biomass, according to the Ottawa Citizen. The plant, fueled with shrubs and crop harvest residue, qualified for carbon credits, which could be sold on the worldwide market. Once in EPCOR's hands the credits could be banked and used if Canadian emissions limits were exceeded. Carbon credit deals thus far had been "small and experimental," Arthur Max reported. Critics of the practice contended that countries, the United States in particular, would use the practice to evade costly expenditures to cut emissions by their own plants.

On the opposite end of the spectrum, in 2001, EPCOR entered into its largest expansion deal outside Alberta, buying Ontario-based Union Energy and West-coast Capital from Westcoast Energy Inc. EPCOR paid $160.7 million, a figure considered pricey by some industry watchers, and assumed about $16 million in debt. Union Energy rented water heaters and dealt in heating, ventilation, and air conditioning products and services. Westcoast Capital provided customer financing for Union Energy products. EPCOR saw the purchase as a point of entry into Ontario's retail electricity and natural gas business. Union Energy's customer base included the important Toronto market, crucial to the capture of a hoped for 20 percent of the province's energy business.

"This is a very important strategic move for EP-COR," Brian Vaasjo, president of the energy division told the Globe and Mail. "EPCOR is on a very aggressive growth strategy, and we aim to be one of the top three providers of energy and energy-related products in Canada."

EPCOR appeared to be balancing aggressive moves with a more moderated philosophy on the other end of the continent. When electricity market prices crash, power plant projects tend to stall. Nonetheless EPCOR, by avoiding speculative building, working with partners, and seeking out long-term contracts for its power, continued to expand even during down times. The strategy limited growth year over year but created greater stability. "In a commodity business you can't build for the top end," EPCOR President Don Lowry told the Seattle Post-Intelligencer.

Consequently, in 2002, in the midst of a slump in the Pacific Northwest market, EPCOR brought a new natural gas-fired generating unit on line. The Frederickson Power Facility, located near Tacoma, Washington, was centrally located: near gas pipelines providing fuel source, the regional transmission grid, and Canadian and California markets. The region's consumption was expected to rebound and grow rapidly over the next two decades.

COMPANY PERSPECTIVES

We create enduring customer relationships and enrich the quality of life for the people, businesses, and communities we serve by providing competitively priced, safe, reliable, and environmentally responsible water and power.

Yet the challenging energy environment of the times took its toll on EPCOR's total revenue. It fell to $2.7 billion in 2002, down one billion from 2001. Net income dropped from $226.9 million to $184.4 million. Although the company's water, generation and distribution, and transmission remained strong, energy services and power development sectors of the integrated company slipped. Lower electricity prices in Alberta reduced energy sales revenue and capital spending on projects such as the Frederick plant and Genesee Phase 3 (G3) elevated capital costs.

In January 2003, EPCOR divested 50 percent of its interest in G3 to TransAlta Corp., gaining $157 million in consideration for construction costs incurred. Through a joint venture agreement, TransAlta would fund half the remaining capital costs for the project. Growth oriented during the first few years of the decade, EP-COR planned to slow the pace during 2003 and "concentrate more on integrating investments, stabilizing operations, conserving capital, and improving operating efficiencies," according to an April 2003 Canada NewsWire release.

Consumer resistance to signing fixed contracts for basic electric and gas service prompted EPCOR to withdraw from the retail natural gas and electricity business. In addition, Alberta's deregulation policy, which EPCOR found prohibitive to expansion, contributed to the decision. Generally speaking, the North American electrical generation market had begun to reverse its course regarding deregulation as citizens protested price spikes. EPCOR planned to concentrate on its commercial, industrial, and wholesale markets and power generation, according to the Ottawa Citizen in August 2003. The company would continue to serve its regulated power customers.

A TIGHTER STRATEGY FOR 2005

In early 2005, EPCOR tightened its focus: "Building a strategy that defined us as one company with two lines of business, concentrated in three geographic regions." In that light the company proceeded to strengthen its core power and water businesses.

In September 2005, EPCOR acquired all of Trans-Canada's interest in TransCanada Power L.P. for $529 million. Following the deal, the operation was renamed EPCOR Power L.P. and began trading on the Toronto Stock Exchange. The company ranked as the largest publicly traded entity headquartered in Edmonton.

The limited partnership owned 11 power generation facilities with a total capacity of 744 megawatts. "We saw the partnership as a great fit for EPCOR," Brian Vaasjo, executive vice-president of EPCOR, told U.S. Business Review. "It fits with our practice of developing or acquiring generation assets whose output was substantially contracted."

Other projects underway included the development of the Britannia Mine water treatment plant. The long abandoned copper mine, which continued to leach contaminants into the surrounding environment, was a major source of heavy metal pollution in North America. The year also was marked by an increasing presence in renewable energy sources via Ontario's Kingbridge I and II wind power projects.

Meanwhile, the Genesee 3 coal-fired power plant began commercial operation in March. The joint venture between EPCOR and TransAlta was the first of its kind for Canada. The supercritical pressure boiler in the facility incorporated "the best available, economically viable technology that is both environmentally friendly and highly efficient," Vaasjo explained. Power Engineering Magazine called it one of the year's top coal-fired power projects worldwide.

The Genesee 3 project, when proposed in 2000, faced a stringent regulatory climate. No coal-fired plants had been approved in the province for two decades. Moreover, the company had not built a comparably sized project for more than ten years. Representing half the company's 2005 generation capacity, the three Genesee units dated back to 1960s coal lease acquisitions.

KEY DATES

1891:: Edmonton Electric Lighting and Power Company is founded.
1902:: The company becomes the first municipally owned electric utility in Canada.
1903:: Edmonton Water and Light Company constructs the first water treatment plant.
1933:: Edmonton's first traffic light is installed.
1947:: Downtown electric lines are put underground.
1955:: Edmonton switches from coal-fired boilers to gas.
1970:: Electrical distribution and power plant departments combine to form Edmonton Power.
1989:: The first Genesee unit begins operating at full load.
1995:: The company is placed under the direction of an independent board of directors.
1996:: EPCOR Utilities Inc. is formed.
2003:: The company exits the retail business.
2005:: EPCOR Power L.P. begins trading on the Toronto Stock Exchange.

Chairman Hugh J. Bolton, in the 2005 annual report, looking back at the company's progress, cited three critical decisions made in the 1990s: separating professional management from city government; uniting the power and water operations under a single company and brand; and affirming future ownership by the city of Edmonton.

The city continued to benefit from the structure set in place a decade earlier. From 1995 through 2005, Edmonton received about $1.27 billion in dividend payments, taxes, and franchise fees. In 1996 the shareholder dividend was $62 million; the dividend was set at $125 million for 2006.

PRINCIPAL SUBSIDIARIES

EPCOR Water Services Inc.; EPCOR Distribution Inc.; EPCOR Energy Inc.; EPCOR Energy Alberta Inc.; EPCOR Merchant and Capital L.P.; EPCOR Generation Inc.; EPCOR Power Development Corporation; EPCOR Preferred Equity Inc.; EPCOR Power L.P.