EPCOR Announces Quarterly Results



    EDMONTON, May 8 /CNW/ - EPCOR Utilities Inc. (EPCOR) today released its
quarterly results for the period ended March 31, 2009.
    "EPCOR reported solid first quarter operating results in both our power
and water operations," said EPCOR President & CEO Don Lowry. "The availability
and performance of our Genesee power plants was above target and higher than
last year, and we continue to execute our capital plan, including construction
of power generation at Keephills 3 and Clover Bar Energy Centre, and water and
wastewater treatment facilities at the Suncor Voyageur site. A major step in
building our water and wastewater treatment expertise was completed this
quarter with the transfer of the Edmonton Gold Bar Wastewater Treatment Plant
to EPCOR. As a result, we are now better able to develop opportunities inside
and outside of Edmonton."

    
    Highlights of EPCOR's financial performance:

    -   Cash flow from operating activities for the three months ended
        March 31, 2009 was $147 million compared with $99 million for the
        corresponding period in the previous year.

    -   Net income was $104 million on revenues of $890 million for the three
        months ended March 31, 2009 compared with $68 million on revenues of
        $799 million for the corresponding period in the previous year.

    -   Other comprehensive income was $22 million for the three months ended
        March 31, 2009 compared with $23 million for the corresponding period
        in the previous year.

    -   Investment in capital projects for the three months ended March 31,
        2009 was $136 million compared with $108 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 interim financial statements are
available on EPCOR's website (www.epcor.ca) and will be available on SEDAR
(www.sedar.com).

    EPCOR's wholly-owned subsidiaries build, own and operate power plants,
electrical transmission and distribution networks, water and wastewater
treatment facilities and infrastructure in Canada and the United States.
EPCOR, headquartered in Edmonton, Alberta, has been named one of Canada's Top
100 employers for nine consecutive years, and was selected one of Canada's 10
Most Earth-Friendly Employers. EPCOR's website is www.epcor.ca.

    
    EPCOR Utilities Inc.

    Interim Management's Discussion and Analysis
    March 31, 2009
    -------------------------------------------------------------------------
    
    This management's discussion and analysis (MD&A), dated May 7, 2009,
should be read in conjunction with the unaudited interim consolidated
financial statements of EPCOR Utilities Inc. and its subsidiaries for the
three months ended March 31, 2009 and 2008, the audited consolidated financial
statements and MD&A for the year ended December 31, 2008 and the cautionary
statement regarding forward-looking information on page 21. In this MD&A, any
reference to "the Company", "EPCOR", "we", "our" or "us", except where
otherwise noted or the context otherwise indicates, means EPCOR Utilities
Inc., together with its subsidiaries. Financial information in this MD&A is
based on the unaudited interim consolidated financial statements, which were
prepared in accordance with Canadian generally accepted accounting principles
(GAAP), 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. The Board of Directors has approved this
MD&A.

    OVERVIEW

    EPCOR is wholly-owned by The City of Edmonton (the City). EPCOR's results
from operating activities for the first quarter were on plan as our power and
water operations across the regions delivered good results. The availability
of our Genesee plants was above target and higher than last year as they did
not experience any major outages in the current quarter. The higher
availability at Genesee 1 and 2 resulted in net availability incentive income
for those units under the terms of the Genesee Power Purchase Arrangement
(PPA). In January 2009, we sold another 10% interest in the Battle River PPA.
The decrease in generation from the Battle River PPA and lower average Alberta
spot power prices resulted in lower margins from Energy Services' Alberta
electricity portfolio in the quarter compared with the first quarter of 2008.
The impact was reduced by effective management of the trading portfolio. Our
water and electric distribution and transmission businesses performed well
without any significant operating issues arising during the quarter.
    EPCOR Power L.P. (Power LP), a 30.6% subsidiary of EPCOR, contributed a
net loss in the quarter primarily due to changes in the fair value of natural
gas supply and foreign exchange contracts. Fair value changes can cause
volatility in Power LP's earnings but are not representative of the underlying
economic performance of Power LP's business. Operating income, excluding fair
value changes, from Power LP's plants was $3 million lower in the first
quarter of 2009 compared with the first quarter of 2008.
    The economic and credit crises continued through the first quarter of
2009. This contributed to a $4 million fair value write-down of the notes
which EPCOR received in exchange for its Canadian non-bank sponsored
asset-backed commercial paper (ABCP). In addition, during this period of
credit uncertainty we relied on our existing credit facilities and ability to
issue commercial paper to fund our capital expenditures. Similarly, Power LP
relied upon its credit facilities to finance capital expenditures during the
period. Power LP's cash distribution for the first quarter of 2009 of $0.63
per unit did not change from recent quarters.
    Progress continued on our capital expenditure program, particularly the
Keephills 3 generation plant, two units at Clover Bar Energy Centre and Power
LP's Southport, Roxboro and North Island plant enhancements. The Gold Bar
Wastewater Treatment Plant (Gold Bar) assets and wastewater treatment
professionals on staff were officially transferred from the City to EPCOR on
March 31, 2009. EPCOR will not only benefit from future earnings from the
facility, but is now better able to develop opportunities outside Edmonton
with its combined water and wastewater treatment expertise. In addition, EPCOR
signed an agreement with the Town of Banff to provide operation services for
the town's wastewater treatment plant for the period from March 24, 2009 to
June 30, 2011.
    On March 26, 2009, the Government of Canada, under Natural Resources
Canada, selected EPCOR, Enbridge Inc. and the Alberta Saline Aquifer Project
(ASAP), acting in partnership, to receive funding under the ecoENERGY
Technology Initiative for the Genesee post-combustion demonstration plant
project. The project focuses on the development of amine scrubbing technology
to remove carbon dioxide from the flue-gas leaving the stack of a coal-fired
generation plant. The amount of funding that the EPCOR-Enbridge-ASAP
partnership will receive will be finalized during the contribution agreement
stage. EPCOR and Enbridge also submitted this project to the Alberta
Government under the $2 billion Carbon Capture Storage funding program.

    SIGNIFICANT EVENTS

    Transfer of Gold Bar Wastewater Treatment Plant

    On March 31, 2009, the City transferred its Gold Bar assets to EPCOR.
Gold Bar handles wastewater treatment requirements for 700,000 residents of
the City and has a current treatment capacity of 310 megalitres per day. The
Edmonton City Council will continue to regulate wastewater treatment services
and rates for the combined drainage utility, which includes the wastewater
collection and transmission system owned by the City and the Gold Bar plant
owned by EPCOR.
    The assets were transferred from the City at their estimated carrying
amounts which are expected to be finalized in the second quarter of 2009. The
carrying amount of the Gold Bar plant assets at March 31, 2009 was estimated
at $223 million which included $40 million of contributed assets on which
EPCOR cannot earn a return, offset by $40 million of capital contributions.
Under the transfer agreement with the City, EPCOR issued approximately $112
million of long-term debt to the City, bearing a weighted average interest
rate of approximately 5.25%. EPCOR also agreed to pay a transfer fee of $75
million to the City in annual installments commencing in 2009 and ending in
2015 and the first installment of $17 million was paid on March 31, 2009. The
remainder of the asset transfer, representing the difference between the
carrying amount of the assets and the liabilities for the transfer fee and
long-term debt, was reflected on the Company's consolidated balance sheet as a
$36 million equity contribution from the City.

    Sale of percentage interest in power syndicate agreement

    On January 15, 2009, we sold a 10% interest in the Battle River Power
Syndicate Agreement (PSA) for cash proceeds of $47 million resulting in a
pre-tax gain of $30 million. The associated income taxes were $4 million of
expense, and $5 million of refundable taxes which were charged to retained
earnings. This sale was pursuant to the purchase and sale agreement entered
into in June 2006 whereby EPCOR will sell its Battle River Power Purchase
Arrangement (PPA) and related interest in the Battle River PSA to ENMAX
Corporation over a four-year period ending in January 2010. An initial
interest of 55% was sold for cash proceeds of $343 million on June 5, 2006
followed by sales of 10% interests on each of January 1, 2007 and January 15,
2008 for cash proceeds of $59 million and $53 million, respectively. The
after-tax gain on the sale in the current quarter was $26 million compared
with $30 million in the first quarter of 2008. The year-over-year decreases in
proceeds and after-tax gain were due to the one year shorter term to maturity
for the PPA.

    Asset-backed commercial paper exchanged for notes

    On January 21, 2009, the restructuring of ABCP took effect. Under the
restructuring, the affected ABCP was exchanged for term floating-rate notes
(notes), maturing no earlier than the scheduled termination dates of the
underlying assets. The exchange was recorded at the estimated fair value of
the notes on January 21, 2009. The key information on EPCOR's notes is as
follows:

    
    (i)    EPCOR's allocation of notes under the restructuring was as
           follows:

           ------------------------------------------------------------------
           Pool         Series          Rating         Face amount
                                                      ($ millions)
           ------------------------------------------------------------------
           MAV2         Class A-1       AA                  $  47        67%
                        Class A-2       AA                      9        13%
                        Class B         Unrated                 2         2%
                        Class C         Unrated                 2         2%
           MAV3         IA Tracking     Unrated                11        16%
           ------------------------------------------------------------------
                                                            $  71       100%
           ------------------------------------------------------------------
           ------------------------------------------------------------------

    (ii)   For the Master Asset Vehicle 2 (MAV2) pool notes, the underlying
           asset lives are anticipated to average nine years. The remaining
           notes come from Master Asset Vehicle 3 (MAV3) in the form of
           Ineligible Asset Tracking (IA Tracking) notes. These notes are
           expected to amortize over the lives of the underlying assets which
           have a weighted average life of approximately 18 years. In certain
           limited circumstances, the expected repayment dates could be
           longer than the expected asset lives.

    (iii)  ABCP investors, including EPCOR, were paid the accumulated accrued
           interest, net of ABCP restructuring costs, collateral requirements
           and other costs, on their existing ABCP from the date of the
           standstill in August 2007 to the date of the restructuring. During
           the first quarter of 2009, EPCOR received $2 million in respect of
           that interest.
    

    At March 31, 2009, the Company held $38 million in notes, all of which
were received in exchange for ABCP which was purchased during the third
quarter of 2007 at an original cost of $71 million. As the notes are
classified as held for trading financial assets, they are subject to ongoing
fair value adjustments at each reporting date. At March 31, 2009, the fair
value of the notes was estimated at $38 million compared with a fair value of
$42 million for the ABCP at December 31, 2008. The $4 million decrease was
primarily due to lower short-term and higher long-term market interest rates.
In the first quarter of 2008, a $9 million reduction in fair value was
recognized.
    The estimate of fair value is subject to significant risks and
uncertainties including the timing and amount of future cash payments, market
liquidity, the quality and tenor of the assets and instruments underlying the
notes, including the possibility of margin calls, and the future market for
the notes. Accordingly, the fair value estimate of the notes may change
materially.

    
    CONSOLIDATED RESULTS OF OPERATIONS

    Net income

    -------------------------------------------------------------------------
    (Unaudited, $ millions)
    -------------------------------------------------------------------------
    Net income for the quarter ended March 31, 2008                    $  68
    Unrealized fair value changes on derivative instruments and
     natural gas inventory held for trading, excluding Power LP fair
     value changes                                                        33
    Higher Genesee PPA availability incentive income                      10
    Maintenance expenses for Genesee 1 scheduled turnaround in 2008        8
    Lower financing expenses, excluding Power LP financing expenses        7
    Lower foreign exchange expense, excluding Power LP foreign exchange
     expense                                                               6
    Lower fair value reduction on notes exchanged for ABCP                 5
    Lower gain on sale of Battle River PSA                                (4)
    Higher administration expenses, excluding Power LP administration     (5)
    Lower Alberta electricity margins                                     (5)
    Lower income from Power LP                                           (19)
    -------------------------------------------------------------------------
    Increase in net income                                                36
    -------------------------------------------------------------------------
    Net income for the quarter ended March 31, 2009                    $ 104
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income was $104 million for the three months ended March 31, 2009,
compared with $68 million for the corresponding period in 2008. The $36
million increase was primarily due to the net impact of the following:

    -   In the first quarter of 2009, the unrealized changes in the fair
        value of our financial contracts that were not designated as hedges
        for accounting purposes were favourable compared with the first
        quarter of 2008, as discussed under Energy Services later in this
        MD&A. This was partly offset by unfavourable unrealized fair value
        changes in our forward foreign exchange contracts compared with the
        corresponding period in the prior year, as discussed under Generation
        later in this MD&A.

    -   Availability incentive income was earned in the first quarter of 2009
        under the terms of the Genesee 1 and 2 PPA compared with a net
        availability penalty in the corresponding period in 2008. The net
        penalty in 2008 was due to major scheduled turnaround work on Genesee
        1.

    -   Maintenance expenses for Genesee 1 were lower due to the scheduled
        turnaround in the first quarter of 2008 whereas there were no outages
        in the first quarter of 2009.

    -   Financing expenses, excluding unrealized fair value adjustments and
        Power LP's financing expenses were lower in the first quarter of 2009
        compared with the first quarter of 2008 primarily due to higher
        capitalized interest and collection of $2 million of interest related
        to the ABCP as described under Significant Events. Although the
        $400 million medium-term notes issue in April 2008 resulted in higher
        interest costs in the current quarter, they were more than offset by
        a higher amount of interest that was capitalized. The Company
        capitalizes borrowing costs as part of its cost of capital
        construction projects and in the first quarter of 2009, construction
        work in progress for Keephills 3 and the Clover Bar Energy Centre was
        higher compared with the corresponding period in 2008.

    -   In the first quarter of 2009, foreign exchange gains were realized on
        the settlement of forward foreign exchange contracts used to
        economically hedge the foreign exchange risk associated with
        anticipated purchases of equipment for generation capital projects.
        In the first quarter of 2008, foreign exchange losses were realized
        on these contracts.

    -   Administration expenses, excluding Power LP's administration
        expenses, were higher due to increased spending in the first quarter
        of 2009 on business development activities and on our Genesee
        Integrated Gasification and Combined Cycle and Carbon Capture
        Technology project.

    -   In the first quarter of 2009, margins for the procurement, marketing
        and sale of electricity in retail and wholesale markets in Alberta
        (Alberta electricity margins) were lower compared with the
        corresponding period of 2008 primarily due to the impact of lower
        Alberta spot power prices on our electricity portfolio. In addition,
        power generation was lower in the current quarter due to our reduced
        interest in the Battle River PSA.

    -   Net income from Power LP was lower in the first quarter of 2009
        compared with the corresponding period in 2008 primarily due to
        unrealized changes in the fair value of natural gas supply contracts.
        Other contributing factors were lower plant operating margins, partly
        offset by a foreign exchange loss in the first quarter of 2008 on the
        translation of U.S. debt. These changes are further discussed under
        Generation in this MD&A.

    Revenues

    -------------------------------------------------------------------------
    (Unaudited, $ millions)
    -------------------------------------------------------------------------
    Revenues for the quarter ended March 31, 2008                      $ 799
    Unrealized fair value changes on derivative instruments and
     natural gas inventory held for trading, excluding Power LP fair
     value changes                                                        89
    Higher Genesee PPA availability incentive revenues                    15
    Higher Water Services' commercial and transportation services
     revenues                                                              8
    Higher Power LP revenues                                               7
    Higher electricity trading activities in Ontario and the north
     eastern U.S.                                                          5
    Lower trading activities in the western U.S.                         (18)
    Lower natural gas trading activities                                 (24)
    Other                                                                  9
    -------------------------------------------------------------------------
    Increase in revenues                                                  91
    -------------------------------------------------------------------------
    Revenues for the quarter ended March 31, 2009                      $ 890
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Consolidated revenues were higher for the three months ended March 31,
2009 compared with the corresponding period in 2008 primarily due to the net
impact of the following:

    -   Unrealized fair value gains were recognized in the first quarter of
        2009 due to decreasing forward Alberta power prices applied to our
        Alberta financial sales contracts that were not designated as hedges
        for accounting purposes. In the first quarter of 2008, unrealized
        fair value losses were recognized on these financial sales contracts
        due to increasing forward Alberta power prices.

    -   Power LP revenues were higher primarily due to the Morris facility
        which was acquired in the fourth quarter of 2008, partly offset by
        lower revenues from other U.S. plants.

    -   Water Services' commercial and transportation services revenues were
        higher primarily due to the water and wastewater treatment facilities
        construction project for Suncor Energy Inc., which commenced in the
        second quarter of 2008.

    Capital spending and investment

    -------------------------------------------------------------------------
    (Unaudited, $ millions)
    Three months ended March 31                            2009         2008
    -------------------------------------------------------------------------
    Generation                                            $ 104        $  77
    Distribution and Transmission                            17           21
    Energy Services                                           4            1
    Water Services                                            9            7
    Corporate - other                                         2            2
    -------------------------------------------------------------------------
                                                          $ 136        $ 108
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Capital expenditures for property, plant and equipment were higher for
the three months ended March 31, 2009 compared with the corresponding period
in 2008 primarily due to increased construction activity on the Keephills 3
and Clover Bar Energy Centre generation projects and Power LP's Southport,
Roxboro and North Island plant enhancements. These increases were partly
offset by capital expenditures in 2008 for the Downtown Edmonton Supply and
Substation project in Distribution and Transmission which was completed in the
third quarter of 2008.
    Despite the current economic conditions, major project construction costs
remain under pressure as project work packages, including material and labour
components, are finalized in the normal course of construction.
    Keephills 3 is a 495-MW supercritical coal-fired generation plant which
is a joint development of EPCOR and TransAlta Corporation at TransAlta's
Keephills site. We continue to manage the schedule and costs of our Keephills
project with it on track to achieve commercial operations by the end of the
first quarter of 2011.
    The Clover Bar Energy Centre will be composed of three natural gas-fired
peaking power generation units. The first unit was commissioned in the first
quarter of 2008, the second unit is expected to be commissioned in the second
quarter of 2009 and construction of the third unit will continue through to
2010.
    Power LP's capital expenditures were $17 million in the three months
ended March 31, 2009 compared with $3 million in the corresponding period in
2008. The capital expenditures in the current quarter included enhancements to
the Southport and Roxboro facilities to reduce their environmental emissions
and improve their economic performance. Power LP is also upgrading the natural
gas turbine at the North Island facility to improve the plant's efficiency.

    
    SEGMENT RESULTS

    Generation

    -------------------------------------------------------------------------
    Three months ended March 31                            2009         2008
    -------------------------------------------------------------------------
    Generation results (including intersegment
     transactions)
    (Unaudited, $ millions)
    Revenues                                              $ 239        $ 221
    Expenses                                                233          132
    -------------------------------------------------------------------------
    Operating income                                      $   6        $  89
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (Unaudited, $ millions)
    -------------------------------------------------------------------------
    Operating income for the quarter ended March 31, 2008              $  89
    Higher Genesee PPA availability incentive income                      15
    Maintenance expenses for Genesee 1 scheduled turnaround
     in 2008                                                              11
    Lower realized foreign exchange expense                                5
    Unrealized fair value changes on derivative instruments               (6)
    Lower Power LP operating income                                     (100)
    Other                                                                 (8)
    -------------------------------------------------------------------------
    Decrease in operating income                                         (83)
    -------------------------------------------------------------------------
    Operating income for the quarter ended March 31, 2009              $   6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Generation's operating income for the three months ended March 31, 2009
decreased $83 million compared with the corresponding period in 2008. Further
information on the year-over-year changes is as follows:

    -   Generation's revenues and operating income increased $15 million due
        to availability incentive income earned under the terms of the
        Genesee 1 and 2 PPA in the first quarter of 2009 compared with a net
        availability penalty in the corresponding period in 2008. There was a
        scheduled turnaround for required maintenance at Genesee 1 in the
        first quarter of 2008 whereas plant availability at Genesee 1 and 2
        was above plan in the first quarter of 2009.

    -   Foreign exchange gains were realized in the first quarter of 2009 on
        the settlement of forward foreign exchange contracts used to
        economically hedge the foreign exchange risk associated with
        anticipated purchases of equipment for Clover Bar Energy Centre and
        Keephills 3 whereas losses were realized on these contracts in the
        corresponding period in 2008.

    -   In the first quarter of 2009, Generation had a lower volume (in terms
        of notional amounts) of forward foreign exchange contracts for U.S.
        dollars compared with the corresponding period in 2008 as the amount
        of anticipated U.S. dollar equipment purchases for the Keephills 3
        and Clover Bar Energy Centre construction projects was lower. The
        unrealized changes in the fair value of these contracts increased
        expenses and decreased operating income by $6 million primarily due
        to the unrealized fair value gains recognized in the first quarter of
        2008.

    -   Power LP contributed an operating loss of $36 million in the first
        quarter of 2009 compared with $64 million of operating income in the
        first quarter of 2008. This $100 million decrease was primarily due
        to $102 million of unrealized changes in the fair value of natural
        gas supply contracts and a $5 million decrease in plant operating
        margins, partly offset by a $13 million foreign exchange loss in the
        first quarter of 2008. Plant operating margins decreased due to
        higher planned maintenance costs and lower generation at the North
        Carolina facilities, lower generation at the Naval Station facilities
        in California due to planned outages for inspection and maintenance
        work, and higher waste heat optimization costs at the Ontario
        facilities.

        Power LP's revenues increased $7 million primarily due to current
        quarter sales at the Morris facility, which was acquired in the
        fourth quarter of 2008. This increase was partly offset by a decrease
        in revenues from other U.S. plants primarily due to lower electricity
        prices for the California plants which, under the terms of the PPA,
        were driven by lower natural gas prices. In addition, generation was
        lower at the Naval Station and North Carolina plants due to planned
        outages.

        Power LP's expenses increased $107 million primarily due to an
        unrealized loss of $34 million in the first quarter of 2009 compared
        with an unrealized gain of $68 million in the first quarter of 2008
        for changes in the fair value of its natural gas supply contracts
        which were included in fuel expense. These unrealized fair value
        changes were due to decreases in the forward market prices for
        natural gas in the first quarter of 2009 compared with increases in
        the first quarter of 2008. Operating expenses for the Morris facility
        also contributed to the increase in Power LP's expenses. Offsetting
        these increases was the $13 million foreign exchange loss recognized
        in net income in the first quarter of 2008 on the translation of U.S.
        debt due to a weakening of the Canadian dollar relative to the U.S.
        dollar. In 2009, a foreign exchange gain on the translation of Power
        LP's U.S. operations was recognized in other comprehensive income.
        This change in accounting treatment for foreign currency translation
        gains and losses resulted from Power LP's re-evaluation of the
        functional currency of its U.S. subsidiaries in the fourth quarter of
        2008 whereby it determined the functional currency to be U.S. dollars
        rather than Canadian dollars.

    Distribution and Transmission

    -------------------------------------------------------------------------
    Three months ended March 31                            2009         2008
    -------------------------------------------------------------------------
    Distribution and Transmission results (including
     intersegment transactions)
    (Unaudited, $ millions)
    Revenues                                              $  61        $  59
    Expenses                                                 49           47
    -------------------------------------------------------------------------
    Operating income                                      $  12        $  12
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    There were no material changes in Distribution and Transmission revenue,
expenses and operating income, for the current quarter compared with the
corresponding period in the prior year.

    
    Energy Services

    -------------------------------------------------------------------------
    Three months ended March 31                            2009         2008
    -------------------------------------------------------------------------
    Energy Services results (including intersegment
     transactions)
    (Unaudited, $ millions)
    Revenues                                              $ 589        $ 528
    Expenses                                                518          514
    -------------------------------------------------------------------------
    Operating income                                      $  71        $  14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (Unaudited, $ millions)
    -------------------------------------------------------------------------
    Operating income for the quarter ended March 31, 2008              $  14
    Unrealized fair value changes in derivative instruments
     and natural gas inventory                                            55
    Lower Alberta electricity margins                                     (6)
    Other                                                                  8
    -------------------------------------------------------------------------
    Increase in operating income                                          57
    -------------------------------------------------------------------------
    Operating income for the quarter ended March 31, 2009              $  71
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Energy Services' operating income increased $57 million for the three
months ended March 31, 2009 compared with the corresponding period in 2008.
Additional information on the year-over-year changes is as follows:

    -   The unrealized fair value changes relate primarily to a net short
        position in both periods for financial electricity contracts that
        were not designated as hedges for accounting purposes. In the first
        quarter of 2009, forward Alberta power prices decreased which
        increased the fair value of the contracts whereas in the first
        quarter of 2008 forward Alberta power prices increased which reduced
        the fair value of the contracts. These unrealized fair value changes
        increased energy revenues by $89 million and energy purchases by
        $34 million compared with the first quarter of 2008.

    -   Alberta electricity margins were lower in the first quarter of 2009
        compared with the corresponding period of 2008 primarily due to the
        impact of lower Alberta power prices on our Alberta electricity
        portfolio. The Alberta electricity portfolio was in a net long
        position for both periods as we had more physical supply from our
        generating stations and interests in the Battle River and Sundance
        PPAs (acquired PPAs) than we had contracted to sell. In addition,
        power generation was lower in the current quarter due to our reduced
        interest in the Battle River PSA.

    -   Energy Services' revenues and expenses, excluding unrealized fair
        value changes, decreased $28 million and $30 million respectively,
        compared with the corresponding period in 2008. The decreases were
        primarily due to lower speculative natural gas trading activity,
        lower natural gas consumption due to fewer wholesale and merchant
        customers, and decreased trading activity in the western U.S., all of
        which had minimal impact on energy margins. Our reduced interest in
        the Battle River PSA also contributed to lower revenues and expenses.
        These decreases were partly offset by higher Alberta electricity
        revenues and purchases for the Regulated Rate Tariff (RRT) business
        and higher trading activity in Ontario and the north eastern U.S.
        with minimal impact on the respective energy margins.

    Water Services

    -------------------------------------------------------------------------
    Three months ended March 31                            2009         2008
    -------------------------------------------------------------------------
    Water Services results (including intersegment
     transactions)
    (Unaudited, $ millions)
    Revenues                                              $  67        $  58
    Expenses                                                 57           47
    -------------------------------------------------------------------------
    Operating income                                      $  10        $  11
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Water Services' revenues from water sales were $3 million higher in the
three months ended March 31, 2009 compared with the corresponding period in
2008 primarily due to increased rates effective April 1, 2008 under Water
Services' Performance Based Rate structure as approved by the regulator, The
City of Edmonton.
    Transportation and other commercial services revenue and expenses
increased in the three months ended March 31, 2009 compared with the
corresponding period in 2008 primarily due to the water and wastewater
treatment facilities construction project for Suncor Energy Inc. Water
Services' expenses also increased due to a higher incidence and cost of water
distribution main breaks, increased business development activity and costs
associated with executing the Gold Bar transfer in the current quarter.

    
    CONSOLIDATED BALANCE SHEETS

    -------------------------------------------------------------------------
                     March 31, December  Increase
    ($ millions)         2009  31, 2008 (decrease)    Explanation
    -------------------------------------------------------------------------
    Cash and cash       $ 124     $ 111     $  13     Refer to liquidity and
     equivalents                                      capital resources
                                                      section.
    -------------------------------------------------------------------------
    Accounts receivable   453       509       (56)    Lower receivables from
     (including income                                RRT customers due to
     taxes recoverable)                               lower rates and
                                                      consumption in March
                                                      2009 compared with
                                                      December 2008. Lower
                                                      receivables from
                                                      commercial and
                                                      industrial customers
                                                      due to fewer customers.
                                                      Lower receivables from
                                                      the Alberta Electric
                                                      System Operator and
                                                      customers subject to
                                                      pool price flow-through
                                                      pricing due to lower
                                                      spot prices in March
                                                      2009 compared with
                                                      December 2008.
    -------------------------------------------------------------------------
    Derivative            142       130        12     Increase in fair value
     instruments                                      of power derivative
     assets (current)                                 sell contracts, partly
                                                      offset by decrease in
                                                      fair value of Power
                                                      LP's natural gas and
                                                      forward foreign
                                                      exchange contracts.
    -------------------------------------------------------------------------
    Other current assets   89        96        (7)
    -------------------------------------------------------------------------
    Property, plant     4,958     4,639       319     Addition of 2009
     and equipment                                    capital expenditures
                                                      and Gold Bar assets
                                                      partly offset by
                                                      depreciation and
                                                      amortization expense.
    -------------------------------------------------------------------------
    Power purchase        549       550        (1)
     arrangements
     (PPAs)
    -------------------------------------------------------------------------
    Contract and          297       296         1
     customer rights
     and other
     intangible assets
    -------------------------------------------------------------------------
    Derivative             87        75        12     Increase in fair value
     instruments assets                               of power derivative
     (non-current)                                    sell contracts, partly
                                                      offset by decrease in
                                                      fair value of Power
                                                      LP's natural gas and
                                                      forward foreign
                                                      exchange contracts.
    -------------------------------------------------------------------------
    Future income         101       103        (2)
     tax assets
     (non-current)
    -------------------------------------------------------------------------
    Goodwill              163       161         2
    -------------------------------------------------------------------------
    Other assets          228       235        (7)
    -------------------------------------------------------------------------
    Assets held for sale   25        43       (18)    Sale of 10% interest
                                                      in Battle River PSA.
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                     March 31, December  Increase
    ($ millions)         2009  31, 2008 (decrease)    Explanation
    -------------------------------------------------------------------------
    Short-term debt     $ 384     $ 140     $ 244     Issue of commercial
                                                      paper, partly offset by
                                                      repayment of short-term
                                                      bankers' acceptances in
                                                      the first quarter of
                                                      2009.
    -------------------------------------------------------------------------
    Accounts payable      508       587       (79)    Lower accrued payables
     and accrued                                      to the Alberta Electric
     liabilities                                      System Operator due to
                                                      lower spot prices in
                                                      March, 2009 compared
                                                      with December, 2008,
                                                      lower current
                                                      liabilities for
                                                      Generation and Water
                                                      Services capital
                                                      projects and timing of
                                                      fuel supply payments
                                                      for U.S. Operations,
                                                      partly offset by the
                                                      current portion of the
                                                      transfer fee payable to
                                                      the City for the Gold
                                                      Bar asset transfer.
    -------------------------------------------------------------------------
    Derivative            155       131        24     Increased liability
     instruments                                      associated with the
     liabilities                                      fair value of power
     (current)                                        derivative buy
                                                      contracts and Power
                                                      LP's natural gas supply
                                                      and forward foreign
                                                      exchange contracts.
    -------------------------------------------------------------------------
    Other current          84        58        26     Increased future income
     liabilities                                      tax liabilities.
    -------------------------------------------------------------------------
    Long-term debt      2,662     2,728       (66)    Repayment of bankers'
     (including                                       acceptances issued
     current portion)                                 under the syndicated
                                                      bank credit facility
                                                      and ongoing debt
                                                      repayments, partly
                                                      offset by the issue of
                                                      long-term debt to the
                                                      City for the Gold Bar
                                                      asset transfer.
    -------------------------------------------------------------------------
    Derivative            101       110        (9)    Decreased liability
     instruments                                      associated with the
     liabilities                                      fair value of power
     (non-current)                                    derivative sell
                                                      contracts, partly
                                                      offset by increased
                                                      liability associated
                                                      with Power LP's natural
                                                      gas supply and forward
                                                      foreign exchange
                                                      contracts.
    -------------------------------------------------------------------------
    Other non-current     168       125        43     Reflects the non-
     liabilities                                      current portion of the
                                                      transfer fee owing to
                                                      the City for the Gold
                                                      Bar asset transfer.
    -------------------------------------------------------------------------
    Future income tax      93       100        (7)
     liabilities
     (non-current)
    -------------------------------------------------------------------------
    Non-controlling       507       540       (33)    Non-controlling
     interests                                        interets' share of
                                                      Power LP distributions
                                                      and net loss, partly
                                                      offset by
                                                      non-controlling
                                                      interests' share of
                                                      Power LP's other
                                                      comprehensive income.
    -------------------------------------------------------------------------
    Shareholder's       2,554     2,429       125     Net income, other
     equity                                           comprehensive income
                                                      and the Gold Bar asset
                                                      capital contribution,
                                                      partly offset by common
                                                      share dividends and
                                                      refundable income
                                                      taxes.
    -------------------------------------------------------------------------



    LIQUIDITY AND CAPITAL RE

SOURCES ------------------------------------------------------------------------- Cash inflows (outflows) ------------------------------------------------------------------------- Three months ended March 31 ---------------- Increase ($ millions) 2009 2008 (decrease) Explanation ------------------------------------------------------------------------- Operating $ 147 $ 99 $ 48 Reflects changes in non-cash working capital due to the timing of receipts and payments, primarily the payment in 2008 of income taxes related to the 2006 gain on sale of the Battle River PSA and receipt of Genesee PPA availability incentive income in the first quarter of 2009 compared with payment of availability penalties in the first quarter of 2008. Investing (128) (76) (52) Reflects payment of a Gold Bar transfer fee instalment and higher capital expenditures, primarily at the Roxboro, Keephills 3, Clover Bar Energy Centre and North Island facilities in the first quarter of 2009, partly offset by spending on the Downtown Edmonton Supply and Substation project in the first quarter of 2008. Financing (11) 2 (13) Reflects higher repayments of long-term debt in the first quarter of 2009 and issue of $200 million of medium-term note debentures in the first quarter of 2008, partly offset by the proceeds from the issue of commercial paper. ------------------------------------------------------------------------- The Company's cash from operating activities increased $48 million in the three months ended March 31, 2009, compared with the corresponding period in 2008. Over the next few quarters, we anticipate working capital requirements to fluctuate due to normal seasonal changes in operating cash flows and the effects of plant outages, scheduled or otherwise. No significant increases in working capital requirements are expected over the long term for existing operations. The Company plans to finance its working capital requirements with existing credit facilities and the issuance of commercial paper. At March 31, 2009, the Company had undrawn bank credit facilities of $1,868 million, of which $376 million is committed for at least two years. Committed bank lines of credit are also used to provide letters of credit. At March 31, 2009, the Company had letters of credit of $234 million (December 31, 2008 - $253 million) outstanding to meet the credit requirements of energy market participants and conditions of certain service agreements, and to satisfy legislated reclamation requirements. The committed bank lines also indirectly back the Company's commercial paper program which has an authorized capacity of $500 million, of which $384 million was outstanding at March 31, 2009 (December 31, 2008 - $113 million). The capital requirements to finance the Company's capital projects are expected to continue at the current pace until at least the end of 2010. In 2009, the projects include Keephills 3, Clover Bar Energy Centre and Power LP's Southport, Roxboro and North Island facility enhancements. This capital spending is expected to be financed with existing credit facilities, the issuance of commercial paper or medium-term notes. The Company has a Canadian shelf prospectus under which it may raise up to $1 billion of debt with maturities of not less than one year. The shelf prospectus expires in November 2009. At March 31, 2009, the available amount remaining under this shelf prospectus was $400 million. In addition, Power LP has a Canadian universal shelf prospectus which expires in August 2010 under which Power LP may raise up to $1 billion in partnership units or debt with a maximum debt amount of $600 million. At March 31, 2009, Power LP had not drawn on the shelf prospectus. Effects of economic downturn and market uncertainty Instability in the Canadian and U.S. financial markets continued through the first quarter of 2009. We secured financing at an interest rate of 0.98% through the issue of commercial paper to fund our capital expenditures and working capital requirements and we plan to continue using commercial paper, existing credit facilities or medium-term notes for our financing requirements for the balance of the year. Two of the Company's bilateral credit facilities totaling $200 million expire in the second quarter of 2009 and we are currently negotiating their renewal. The unstable credit and economic environment may adversely affect the interest rates at which we are able to draw on these facilities as they are renewed or extended. To date, indications are that we will be able to renew these facilities and draws under these facilities will be at increased effective interest rates. The market price of Power LP's partnership units declined and remained relatively low in the first quarter of 2009. Accordingly, under these conditions Power LP does not expect to rely on public equity markets to finance asset acquisitions. Power market liquidity continues to be a concern as energy commodity trading in our markets continues to be less active. However, due to the strength of our trading counterparties, we continue to be able to effectively manage our portfolio. If the world-wide credit and economic crises continue into the longer term, particularly as they relate to Canada and the U.S., they may adversely affect 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. If market conditions worsen, the Company may suffer a credit rating downgrade and be unable to renew its bilateral credit facilities or access the public debt markets. Although we continue to believe that these circumstances have a low probability of occurring, we are monitoring EPCOR's capital programs and operating costs to minimize the risk that the Company becomes short of cash or unable to honor its obligations. Some of these considerations include the preservation of capital through capital expenditure reduction or deferral, operating cost reductions and sale of non-strategic assets. CONTRACTUAL OBLIGATIONS On March 31, 2009, EPCOR issued $112 million of long-term debt to the City and incurred a $75 million transfer fee payable to the City, for the Gold Bar asset transfer as described under Significant Events. The long-term debt bears interest at a weighted average interest rate of approximately 5.25% and matures over the period from 2010 to 2033 as follows, subject to adjustments to be finalized in the second quarter of 2009: ------------------------------------------------------------------------- (Unaudited, $ millions) ------------------------------------------------------------------------- 2009 $ 6 2010 6 2011 6 2012 5 2013 to 2033 89 ------------------------------------------------------------------------- Total $ 112 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The transfer fee is payable in annual installments over the period from 2009 to 2015 and is included in the table of contractual obligations in EPCOR's 2008 annual MD&A. The first instalment of $17 million was paid on March 31, 2009. During the quarter ended March 31, 2009, the Company financed its capital expenditures and working capital requirements through its credit facilities and commercial paper program. The Company's outstanding commercial paper, and loans and bankers' acceptances issued under credit facilities, increased $61 million in the quarter, including $32 million relating to Power LP debt issues. There have been no other material changes to the Company's purchase obligations, including payments for the next five years and thereafter, during the first quarter. For further information on the Company's contractual obligations, refer to the 2008 annual MD&A. CHANGES IN ACCOUNTING STANDARDS Accounting changes for 2009 Rate-regulated operations In December 2007, the Canadian Institute of Chartered Accountants (CICA) amended Handbook Sections 1100 - Generally Accepted Accounting Principles and made consequential amendments to Accounting Guideline 19 - Disclosures by Entities Subject to Rate Regulation. The amendments removed the temporary exemption from the requirement to apply Section 1100 to the recognition and measurement of assets and liabilities arising from rate regulation, effective January 1, 2009. As permitted by Canadian GAAP, the Company is applying the U.S. Financial Accounting Standards Board (FASB) standard, Statement of Financial Accounting Standards No. 71 - Accounting for the Effects of Certain Types of Regulation (SFAS 71), which provides guidance for the recognition and measurement of rate-regulated assets and liabilities. These amendments and adoption of the SFAS 71 guidance effective January 1, 2009, did not have a material impact on our interim consolidated financial statements and is not expected to have a material impact going forward. Intangible assets In February 2008, the CICA issued Handbook Section 3064 - Goodwill and Intangible Assets and consequential amendments to Section 1000 - Financial Statement Concepts. The new section establishes standards effective January 1, 2009 for the recognition, measurement and disclosure of goodwill and intangible assets. The provisions relating to the definition and initial recognition of intangible assets, including internally generated intangible assets, are equivalent to the corresponding provisions in International Financial Reporting Standards. EPCOR has adopted these amendments commencing January 1, 2009 and applied them on a retrospective basis, resulting in the reclassification of $89 million of net assets from property, plant and equipment to contract and customer rights and other intangible assets in the comparative December 31, 2008 balance sheet. The adoption of these amendments had no other material impact on our interim consolidated financial statements. Credit risk and fair value of financial assets and liabilities On January 20, 2009, the Emerging Issues Committee of the CICA issued EIC-173 Credit Risk and the Fair Value of Financial Assets and Liabilities, which clarifies that an entity's own credit risk and the credit risk of its counterparties should be taken into account in determining the fair value of financial assets and liabilities, including derivative instruments. Effective January 1, 2009, the Company adopted the recommendations of EIC-173 and applied them retrospectively without restatement of prior periods. Including counterparty credit risk in the estimate of the fair value of Power LP's natural gas and foreign exchange contracts on January 1, 2009 had the following impact on EPCOR's balance sheet on that date: ------------------------------------------------------------------------- Increase (Unaudited, $ millions) (decrease) ------------------------------------------------------------------------- Derivative instruments assets - non-current $ (1) Derivative instruments liabilities - non-current (6) Future income tax liabilities - non-current 1 Non-controlling interests 3 Opening retained earnings 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Future accounting changes International financial reporting standards In February 2008, the CICA confirmed that Canadian reporting issuers will be required to report under International Financial Reporting Standards effective January 1, 2011, including comparative figures for the prior year. In January 2008, we established a core team to develop a plan which will result in the Company's first interim report for 2011 being in compliance with International Financial Reporting Standards. The diagnostic phase of the project was completed in April 2008. For each international standard, we identified the primary differences from Canadian GAAP and made an initial assessment of the impact of the required changes for the purpose of prioritizing and assigning resources. In making the assessment, the number of businesses impacted, the potential magnitude of the financial statement adjustment, the availability of policy choices, the impacts on systems and the impacts on internal controls were all considered. The information obtained from the diagnostic phase was used to develop a detailed plan for convergence and implementation. The convergence and implementation work has five key sections: Financial Statement Adjustments, Financial Statements, Systems Updates, Policies and Internal Controls, and Training. Financial Statement Adjustments For each international standard, we will determine the quantitative impacts to the financial statements, system requirements, accounting policy decisions, and changes to internal controls and business policies. The initial accounting policy decisions will be brought forward to the Audit Committee for their information as each standard is addressed. However, final accounting policy decisions for all standards in effect at the end of 2009 will be made in the fourth quarter of 2009, as they should not be determined in isolation of other policy decisions. Policy decisions for any new standards or standards that are amended in 2010 will be made in conjunction with our analysis of those standards in 2010. As the project progresses, the timing of completion of certain items may change as changes to standards and other external factors such as discussions with certain stakeholders may result in a change in priorities. However, we believe the project has sufficient resources to meet the overall project timeline. Financial Statements There are also a number of international standards which relate to financial statement presentation. Draft financial statements highlighting the disclosure and presentation requirements were reviewed by and discussed with the EPCOR Audit Committee in the first quarter of 2009. Recommendations on certain presentation issues such as whether to present the income statement by function or nature of expense will be brought forward in the second quarter of 2009. The development of the financial statement presentation will evolve throughout the project as the impacts of implementing the various standards are quantified. Systems Updates The diagnostic phase of the project identified two key accounting system requirements. The system must be able to capture 2010 financial information under both the prevailing Canadian GAAP and International Financial Reporting Standards to allow comparative reporting in 2011, the first year of reporting under International Financial Reporting Standards. It must also be able to accommodate possible changes to foreign currency translation methods, depending on how certain foreign entities are classified under International Financial Reporting Standards. EPCOR developed a systems strategy in 2008 and commenced implementation of this strategy in the first quarter of 2009. This strategy involves the implementation of a parallel fixed asset subledger and general ledger, which is planned for completion in the third quarter of 2009. Policies and Internal Controls In the determination of the financial statement adjustments, requirements for changes to Company policies and internal controls will be identified and documented. As there may be factors other than International Financial Reporting Standards impacting policies and internal controls, the formal documentation and approval of revised policies and internal controls will not occur until the third quarter of 2010. The impact of International Financial Reporting Standards on certain agreements, such as debt, shareholder and compensation agreements, has also been included in the plan. Strategies to address these issues are being developed and will be completed in the second quarter of 2009. Training The Company recognizes that training at all levels is essential to a successful conversion and integration. Accounting staff have attended two training sessions with more planned to occur throughout the conversion process. The Board of Directors and Audit Committee have attended a training session, and the Audit Committee receives regular updates on the conversion project. Further training for the Board of Directors and Audit Committee will occur throughout the project. Consolidated financial statements and non-controlling interests In January 2009, the CICA issued Handbook Section 1601 - Consolidated Financial Statements and Section 1602 - Non-controlling Interests, which replace Section 1600 - Consolidated Financial Statements. Section 1601 establishes the standards for the preparation of consolidated financial statements while Section 1602 establishes the standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. Section 1602 is equivalent to the corresponding provisions of International Accounting Standard 27 - Consolidated and Separate Financial Statements. Sections 1601 and 1602 will apply to EPCOR's interim and annual consolidated financial statements relating to periods commencing on or after January 1, 2011. Earlier adoption is permitted as of the beginning of a fiscal year provided Section 1582 - Business Combinations is also adopted at the same time. The impact of the new standards and the option to adopt them early will be assessed as part of our International Financial Reporting Standards project. Business combinations In January 2009, the CICA issued Handbook Section 1582 - Business Combinations, which replaces Section 1581 - Business Combinations and provides the Canadian equivalent to International Financial Reporting Standard 3 - Business Combinations. The section will apply on a prospective basis to EPCOR's business combinations for which the acquisition date is on or after January 1, 2011. Earlier adoption is permitted as of the beginning of a fiscal year provided Sections 1601 - Consolidated Financial Statements and 1602 - Non-controlling Interests are also adopted at the same time. The impact of the new standard and the option to adopt it early will be assessed as part of our International Financial Reporting Standards project. CRITICAL ACCOUNTING ESTIMATES In preparing the consolidated 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 consolidated financial statements: electricity revenues, costs and unbilled consumption, fair values, allowance for doubtful accounts, useful lives of assets, income taxes and PPA availability incentives. For further information on the Company's accounting estimates, refer to the 2008 annual MD&A. RISK MANAGEMENT This section should be read in conjunction with the Risk Management section of the most recent annual MD&A. EPCOR faces a number of risks including electricity price and volume risk, natural gas price and volume risk, operational risk, environment, health and safety risk, political, legislative and regulatory risk, project risk, credit risk, financial liquidity risk, supply risk of acquired PPAs, availability of people risk, weather risk, foreign exchange risk, conflicts of interest risk, and general economic conditions and business environment risks. The Company employs active programs to manage these risks. On March 20, 2009, EPCOR was charged under Alberta's Occupational Health and Safety Act (the Act) and Occupational Safety Code (the Code) in relation to the 2007 fatality of a power lineman employee who came in contact with energized equipment at a job site in south Edmonton. The charge under the Act relates to failure to ensure, as far as it was reasonably practicable to do so, the health and safety of the employee. The three charges under the Code relate to safe work plan provisions, Alberta Electric Utility Code rules and work process safeguards with respect to energized electrical cables. We are reviewing the charges and have requested more information from the Solicitor General's office regarding the specifics of the allegations. A court date of May 12, 2009 has been set to hear the charges. Each charge could attract a fine of up to $500,000 upon conviction. 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 annual MD&A for 2008. OUTLOOK In the quarter ended March 31, 2009, plant availability at Genesee 1 and 2 improved markedly over the prior year due to the scheduled turnaround work completed in 2008 and optimal plant operation in the current quarter. This level of plant performance should continue for the balance of the year and availability incentive income should be at the level achieved in the first quarter, unless Alberta power prices change materially. We expect net income, before the impact of fair value changes, for the next three quarters to be consistent with that of the first quarter of 2009 subject to the potential impact of the following events. Earnings in the next three quarters will benefit from the March 31, 2009 addition of the Gold Bar operation. Earnings from our portfolio of commercial water services contracts should increase with the addition of the contract for operation services for the Town of Banff's wastewater treatment plant which commenced on March 24, 2009. Water Services also anticipates substantially completing the construction of the water and wastewater treatment facilities at the Suncor Voyageur site in Fort McMurray, Alberta by the end of the second quarter. EPCOR will own and operate the facilities under a commercial arrangement with Suncor. Due to the slowdown in oilsands activity, the plant is currently not expected to commence operations in 2009 as planned. The second unit of the Clover Bar Energy Centre is expected to start operating and contributing to net income by the third quarter of 2009. SUBSEQUENT EVENT On May 8, 2009 EPCOR announced its plans to create Capital Power Corporation, a power generation company that will be permanently headquartered in Edmonton. Capital Power Corporation and its subsidiaries (Capital Power) will acquire all the power generation assets and related operations of EPCOR, including its 30.6% interest in Power LP, and be responsible for operating the generating plants currently owned by EPCOR and Power LP. EPCOR may eventually sell all or a substantial portion of its ownership interest in Capital Power, subject to market conditions, its requirements for capital and other circumstances that may arise in the future, with proceeds from share sales to be reinvested in EPCOR's growing utility infrastructure businesses, including water, wastewater, power transmission and power distribution. EPCOR is planning an Initial Public Offering of common shares of Capital Power representing approximately 25% of the Company's power generation business. A preliminary prospectus for the offering is expected to be filed with securities regulators in Canada. EPCOR anticipates that the closing of the initial public offering of Capital Power shares will be completed in mid-2009. Employees will move to Capital Power at closing, with transaction arrangements in place between the companies in order to ensure continuity of operations and services. At March 31, 2009, the carrying value of the assets to be sold to Capital Power was $5 billion (December 31, 2009 - $5 billion) and revenue for the three months then ended were $708 million (March 31, 2008 - $633 million). 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. Forward-looking information in this MD&A includes: (i) Keephills 3 construction will be completed by the end of the first quarter of 2011; (ii) installation of the remaining two units at the Clover Bar Energy Centre is planned for completion in the second quarter of 2009 and in 2010, respectively; (iii) capital requirements to finance the Company's capital projects are expected to continue at the current pace until at least the end of 2010 and capital spending in 2009 is expected to be financed with existing credit facilities, the issuance of commercial paper or medium-term notes; (iv) the Company plans to continue using commercial paper and existing credit facilities for its working capital requirements; (v) the Company will be able to renew its $200 million bilateral credit facility which expires in the second quarter of 2009 and draws under this facility will be at increased effective interest rates; (vi) the expected timing and payments of the long-term debt issued to the City for the Gold Bar asset transfer; (vii) expectations regarding the impact on the Company of the capital and credit market instability and expected risk mitigation plans; (viii) Genesee 1 and 2 plant performance will continue for the remainder of the year resulting in availability income levels similar to those achieved in the first quarter of 2009; (ix) earnings for the remainder of 2009 will benefit from the addition of the Gold Bar operation; (*) earnings for the next three quarters, before fair value changes, will be consistent with that of the first quarter of 2009; (xi) the expectation that the Company will substantially complete the construction of the water and wastewater treatment facilities at the Suncor Voyageur site in Fort McMurray, Alberta by the end of the second quarter and will not commence operation of the facilities in 2009 as planned; and (xii) the Company is planning to create Capital Power Corporation which, together with its subsidiaries, will acquire all the power generation assets and related operations of EPCOR and complete an Initial Public Offering of its common shares representing approximately 25% of the Company's power generation business. 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) power plant availability, including those subject to acquired PPAs (iii) the Company's assessment of commodity and power markets; (iv) the Company's assessment of the markets and regulatory environments in which it operates; (v) weather; (vi) availability and cost of labour and management resources; (vii) performance of contractors and suppliers; (viii) availability and cost of financing; (ix) foreign exchange rates; (*) management's analysis of applicable tax legislation; (xi) the currently applicable and proposed tax laws will not change and will be implemented; (xii) proposed environmental regulations will be implemented; (xiii) counterparties will perform their obligations; (xiv) expected interest rates, related credit spreads and mortality rates for new notes exchanged for ABCP; (xv) ability to implement strategic initiatives which will yield the expected benefits; and (xvi) the Company's assessment of capital markets and ability to complete the planned Initial Public Offering of 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. Such risks and uncertainties include, but are not limited to risks relating to: (i) operation of the Company's facilities (ii) power plant availability and performance; (iii) unanticipated maintenance and other expenditures; (iv) availability and price of energy commodities; (v) electricity load settlement; (vi) regulatory and government decisions including changes to environmental, financial reporting and tax legislation; (vii) weather and economic conditions; (viii) competitive pressures; (ix) construction; (*) availability and cost of financing; (xi) foreign exchange; (xii) availability of labour and management resources; (xiii) performance of counterparties, partners, contractors and suppliers in fulfilling their obligations to the Company; and (xiv) the capital market's interest in Capital Power's planned Initial Public Offering. 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. QUARTERLY RESULTS ------------------------------------------------------------------------- Quarter ended Revenues Net income ------------------------------------------------------------------------- (Unaudited, $ millions) March 31, 2009 890 $ 104 December 31, 2008 807 15 September 30, 2008 958 76 June 30, 2008 868 16 March 31, 2008 799 68 December 31, 2007 962 59 September 30, 2007 928 67 June 30, 2007 863 53 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Events for 2008 and 2007 quarters that have significantly impacted net income and the comparability between quarters are: - December 31, 2008 fourth quarter results reflected impairment charges on the goodwill associated with the investment in Power LP and on Power LP's investment in PERH. Power LP also recognized unrealized fair value losses on its forward foreign exchange contracts used to economically hedge U.S. cash flows and on its natural gas supply contracts. - September 30, 2008 third quarter results reflected gains on the sale of portfolio investments and unrealized fair value gains on financial electricity contracts, Joffre contract for differences and forward foreign exchange contracts. These gains were partly offset by administration costs resulting from Long-Term Incentive Plan (LTIP) adjustments, and lower income from Power LP. - June 30, 2008 second quarter results reflected maintenance costs and Genesee PPA availability penalties resulting from scheduled turnarounds on all three Genesee plants partly offset by the favourable impact of high Alberta power prices on our financial contract portfolio, and unrealized fair value gains on Power LP's natural gas supply contracts. - March 31, 2008 first quarter results included a $30 million gain on the sale of a 10% interest in the Battle River PSA, the favourable impact of high Alberta power prices on our financial contract portfolio which was in a net long position and unrealized fair value gains on Power LP's natural gas supply contracts. These gains were partly offset by maintenance costs and Genesee PPA availability penalties resulting from a scheduled turnaround at Genesee 1, and a fair value reduction of ABCP. - December 31, 2007 fourth quarter results included unrealized fair value gains on derivative financial instruments in our Alberta merchant and wholesale portfolio which were not designated as hedges for accounting purposes, and unrealized fair value gains on Power LP's natural gas supply contracts. These gains were partly offset by a reduction in the fair value of ABCP and a future income tax charge for the impact of future tax rate reductions which were substantively enacted in December 2007. - September 30, 2007 third quarter results included higher Alberta electricity margins due to favourable settlements on financial sales as a result of higher contract prices and lower Alberta power prices. In addition, the results included favourable unrealized fair value changes in financial and non-financial derivative instruments, which were not designated as hedges for accounting purposes, in Alberta merchant and wholesale positions due to lower forward power prices combined with a net short position. - June 30, 2007 second quarter results included unrealized fair value decreases in derivative financial instruments which were not designated as hedges for accounting purposes, resulting from increasing forward market prices. In addition, income from Power LP included unrealized fair value decreases for the natural gas supply contracts resulting from decreasing forward natural gas prices and contract price changes for the Tunis plant. Additional information Additional information relating to EPCOR, including EPCOR's annual information form, is available on SEDAR at www.sedar.com.

For further information:

For further information: Media inquiries: Tim le Riche, (780) 969-8238;
Shareholder and analyst inquiries: Randy Mah, (780) 412-4297 or toll free
(866) 896-4636

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