EPCOR Utilities Inc. described in this document has been filed with - - PowerPoint PPT Presentation

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EPCOR Utilities Inc.

Investor Presentation November 2018

Tony Scozzafava Senior Vice President & Chief Financial Officer Pamela Zrobek Treasurer

A final base shelf prospectus containing important information relating to the securities described in this document has been filed with the securities regulatory authorities in each of the provinces of Canada. A copy of the final base shelf prospectus, any amendment to the final base shelf prospectus and any applicable shelf prospectus supplement that has been filed, is required to be delivered with this document. This document does not provide full disclosure of all material facts relating to the securities

• ffered. Investors should read the final base shelf prospectus, any amendment and any

applicable shelf prospectus supplement for disclosure of those facts, especially risk factors relating to the securities offered, before making an investment .

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Forward-Looking Information

Certain information in this presentation 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”, “could” and “expect” or similar words suggest future outcomes. Forward looking information in this presentation includes, or is related to, but is not limited to: (i) 2018 capital investment forecast; (ii) developing new operating hubs; (iii) the solar farm at E.L. Smith Water Treatment Plant; (iv) the Southern Bruce (Kincardine) greenfield natural gas distribution system; (v) the acquisition of Rio Verde Utilities Inc.; (vi) refunds and bill credits in Arizona, New Mexico and Texas; (vii) the consolidation of EPCOR's water districts; (viii) the procurement of energy under the new EPSP; (ix) the commitment to maintaining credit ratings; (x) earnings from rate regulated businesses; (xi) EPCOR’s disciplined approach to growth; and (xii) expectations of accessing debt capital markets. Forward-looking 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

• r 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). The purpose of financial outlook is to provide readers with management’s assessment of future plans and possible outcomes and may not be appropriate for other purposes. 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

• ther reason.

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Strategy & Overview

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EPCOR Corporate Snapshot

• Municipally controlled corporation,
• wned by City of Edmonton.
• Governed by independent Board of

Directors; shareholder not involved in decision making except for very material dispositions.

• Predominantly rate regulated business

with limited commercial exposure carried

• ut under long-term contracts with

investment grade counterparties.

• Long-life, high quality, infrastructure

assets in North America.

• Committed to maintaining strong credit

rating.

• S&P: A-; stable outlook

(confirmed Sept. 20, 2018)

• DBRS: A (low); stable outlook

(confirmed Sept. 21, 2018)

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EPCOR Organizational Structure

City of Edmonton EPCOR Utilities Inc. Water Services Distribution & Transmission Energy Services U.S. Operations Western Canada Alberta Alberta U.S. Southwest

• Treatment, transmission,

distribution and sale of water

• Collection and conveyance
• f wastewater and

stormwater

• Treatment of wastewater
• Electricity distribution

and transmission

• Transportation electrical

infrastructure (ie: street lighting, traffic signals and light rail transit)

• RRO electricity service

to residential and small commercial customers

• Sale of electricity and

natural gas though Encor brand

• Billing, collection and

contact centre services

• Regulated water,

wastewater and natural gas utility services

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EPCOR Operations

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All amounts in millions of CDN dollars, as of the quarter ending September 30, 2018 Last twelve months (“LTM”)

2018 Q3 LTM – Segment Overview

42% 28% 7% 22% 1%

Consolidated Operating Income - $384 Million

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Strategic Direction

Conservative Growth Profile

• Disciplined approach to placement of capital with a focus on

markets where we have a competitive advantage.

• Investments heavily weighted towards rate regulated utility

infrastructure.

• Over 80% of capital investment is in regulated

businesses.

• 2018 capital investment forecasted at $625M - $725M.
• Developing new operating hubs in Ontario and Texas.
• M&A opportunities considered if a strategic fit and meet

investment criteria.

Market Reputation

• Continue to build reputation as a trusted developer and
• perator of utility assets.
• Zero injury culture.
• Service reliability.
• Environmental responsibility.

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Segment Highlights

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Key Developments

• Drainage Services was transitioned from City of Edmonton to EPCOR effective September 1,

2017, adding 684 new employees. A new EPCOR Drainage Services Bylaw was approved in September 2017 for sanitary and stormwater rates effective January 1, 2018 to March 31,

• 2022. Under this Bylaw rate increases are held at 3% per year. Continue to evaluate
• pportunities for synergies and process improvement to drive results.

Water Services Highlights

20 40 60 80 100 120 140 160 180 2014 2015 2016 2017 2018 Q3 LTM

Operating Income

$ Million

• EPCOR Water is planning to build a 12 MW

solar farm at the E.L. Smith Water Treatment Plant to replace purchased power with green power. The project requires regulatory approvals from both Alberta Utilities Commission (AUC) and City of Edmonton. If approved, the solar farm is expected to be in service by end of 2019.

• Increase in 2018 Q3 LTM operating income

reflects a full twelve months of Drainage

• perations as well as increased customer

growth.

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Distribution & Transmission (D&T) Highlights

Key Developments

• AUC Generic Cost of Capital 2018-2020 Decision maintained a return on equity rate of

8.5%, based on a capital structure of 37% equity and 63% debt.

• Distribution 2018-2022 Next Generation PBR (PBR rebasing).
• All utility anomalies denied (good for EDTI); capital funding level equal to the average
• f 2013-2016 capital additions, approximately $150 million per year.

20 40 60 80 100 120 140 2014 2015 2016 2017 2018 Q3 LTM

Operating Income

$ Million

• 2018-2019 Transmission Facility Owner (TFO)

Application Decision received in October

• 2018. Approved Revenue Requirement in-line

with EDTI expectations.

• Riverview Substation facility application

approved by the Commission. Anticipated in service date in Q4 2019.

• Operating income has declined primarily as a

result of lower transmission access services charge net collections. Transmission system access service charge net collections are timing differences.

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Ontario Hub Development

EPCOR’s Southern Ontario Locations

• NRG (Aylmer) acquisition completed
• n November 1, 2017.
• Rate Regulated by OEB.
• ~8,700 natural gas customers.
• Cash consideration of $22 million.
• Collus PowerStream (Collingwood)

acquisition completed October 1, 2018.

• 100% interest in electric

distribution company in Collingwood, Ontario.

• ~18,000 customers.
• Cash consideration of $28 million

and assumption of $16 million in third party debt.

• Southern Bruce (Kincardine) greenfield natural gas distribution system.
• Selected proponent by OEB; announced April 2018.
• Awaiting confirmation of the availability of funding from the Province of Ontario.
• Expect to break ground in 2019 with system completed in 2021.

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U.S. Operations Highlights

10 20 30 40 50 60 70 80 90 2014 2015 2016 2017 2018 Q3 LTM

Operating Income

$ Million

Key Developments

• In August 2018, EPCOR agreed to acquire Rio Verde Utilities Inc.
• 2,220 water and 1,876 wastewater service connections and irrigation water service for five golf

courses.

• The ACC is expected to approve the purchase in early 2019.
• In August 2017, at the ACC’s request, EPCOR filed a rate application that seeks to consolidate some
• r all of EPCOR’s water districts. A final decision is expected in Q4 2018.
• U.S federal income tax reduced from 35% to 21%

after January 1, 2018; no material financial impact expected.

• Arizona wastewater customer refunds to be

completed by year-end 2018. Arizona water customer refunds pending ACC approval in

• Dec. 2018.
• Texas customers expected to receive bill

credits beginning Nov. 2018.

• Rate case for refunds filed to refund New

Mexico customers pending approval in 2019.

• 2018 Q3 LTM operating income has risen as a

result of higher wastewater customer rates, higher water sales volumes and a full twelve months of Hughes Gas.

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Energy Services Highlights

• Non-Energy filing (2018-2020 RRT) Decision received in
• Oct. 2018; approved Revenue Requirement in line with

EEA expectations.

• Customer Information System (CIS) replacement

project was approved.

• Legislative Changes:
• RRO rate cap of 6.8 cents per kilowatt hour

effective June 2017 until 2021. Providers compensated if RRO rates exceed the cap (rate cap has been triggered four times).

• Competitive Retail (Encor) now comprises 12% of total

Edmonton sites and continues to deliver strong growth.

10 20 30 40 50 2014 2015 2016 2017 2018 Q3 LTM

Operating Income

$ Million

Key Developments

• Energy Price Setting Plan (EPSP) (2018-2021) was approved in Decision 22357-D01-2018, March 16, 2018.
• The new auction methodology and market-based commodity risk compensation mechanism proposed

by EEA were approved.

• Current methodology, approved in 2016, resulted in lower EPSP margins and a decline in operating

income as risk margin on energy purchases was transferred from retailer to rate payer.

• New methodology removes timing differences between changes in commodity risk levels and

adjustments to EEA’s commodity risk compensation and transfers some of the risk margin back to the retailer.

• Procurement of energy under the new EPSP will begin December 2018 with rates effective April 1,

2019 and is expected to improve margins and operating income.

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Financial Update

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Excellent business risk profile

• >95% of EBITDA comes from rate regulated

business.

• Good sector and geographic diversity –

enhanced by entry into the natural gas sector in Texas and Ontario.

• Strong competitive position.

Strong financial risk profile

• Strong balance sheet.
• Solid operating cash flow and liquidity

metrics.

• Competitive access to capital.
• Disciplined growth strategy.
• While several Canadian utility companies

have made large acquisitions at high premiums resulting in significant increases in leverage and risk, EPCOR maintains a disciplined approach to growth.

EPCOR Financial Profile

Earnings Mix

98% 2%

Regulated Non-Rate Regulated/Contracted

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Overview of Financial Results

($ millions) 2016 2017 Q3 2018 (LTM) Net Income 309 256 275 Operating Income 379 356 384 Funds From Operations 412 478 558 Total Debt 1,920 2,866 2,537 Gross Assets 6,161 10,358 10,231 Debt to Capitalization 42% 45% 41% FFO/Debt 22% 17% 22%

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• 2016 net income higher primarily due to gains from the sale of

Capital Power shares and dividend income from Capital Power.

• Drop in 2017 FFO/Debt caused by full debt burden of the

drainage transfer but only four months of FFO.

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Net Asset Growth

Note: assets net of contributions

$4.4 B

$6.8 B

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Financial Strength

16% 21% 22% 17% 22% $337 $435 $412 $478 $558

0% 5% 10% 15% 20% 25% 30% 35% 40% 2014 2015 2016 2017 2018 Q3 LTM

FFO to Debt

 FFO ($M)

47% 46% 42% 45% 41%

34% 36% 38% 40% 42% 44% 46% 48% 50% 2014 2015 2016 2017 2018 Q3 LTM

Debt to Capitalization

• Commitment to maintaining strong “A” credit rating, with significant

financial flexibility.

• Strengthening cash flow and earnings, driven by BU performance.
• FFO compound average annual growth rate of 13% since 2014.
• Drop in 2017 FFO/Debt caused by full debt burden of the drainage

transfer but only four months of FFO.

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• Good access to capital and short-term liquidity.
• Committed syndicated credit facility:
• $600 million to support growth.
• Matures December 2022.
• Five $40 million uncommitted bilateral facilities:
• Limited to letter of credit issuance.
• Approximately 71% undrawn.
• Capital growth will be financed with a combination of cash flow and

debt issuances.

• Unutilized $2 billion Medium Term Note program.
• Market supportive of additional EPCOR debt issuance.
• Debt issuance
• Issued $400 million 30-year MTN in November 2017, ahead of January

2018 maturity, with coupon rate of 3.554%.

• Expect to more regularly access debt capital markets to fund business

requirements.

Financing and Liquidity

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Debt Maturities

• Debt maturities are well laddered without any notable pressure points.
• No material near-term maturities.
• Preference for long-dated tenors to align with long-lived asset base.

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450

$ Millions EUI EUI USD

Note: maturity schedule excludes amortizing debt principal payments of approximately $27M per year until 2042.

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Investment Highlights

• Strong financial performance across all business units.
• With long term receivable from Capital Power completely repaid, there

is no remaining exposure.

• Drainage transfer enhances EPCOR’s regulated business activities.
• Approximately 95% of earnings will now come from rate regulated

businesses.

• Improved industry and geographic diversity.
• Enhanced by entry into the natural gas sector in Texas and Ontario.
• Strong balance sheet, supportive regulatory environment and

disciplined capital placement approach provide an attractive investment opportunity.