EPCOR Announces Quarterly Results

EDMONTON, Nov. 6 /CNW/ - EPCOR Utilities Inc. (EPCOR) today released its quarterly results for the period ended September 30, 2009.

"Looking beyond the Capital Power transaction, our performance for the third-quarter was on target. We are now beginning to see the benefits of the Gold Bar Wastewater Treatment Plant transfer on March 31 of this year. We believe that we are in a strong position for growth going forward, and our fourth-quarter results will reflect the recently-announced Suncor potable and domestic wastewater assets acquisition."

"The Capital Power transaction, which closed at the beginning of the third quarter, resulted in the sale of the generation business to Capital Power at a fair value which was lower than the book value, resulting in a loss recorded in this quarter's results," said Don Lowry, President and CEO. "We had anticipated this result and noted an estimate of the loss in our second quarter Interim Report."

    
    Highlights of EPCOR's financial performance:

    -   Cash flow from operating activities for the three months ended
        September 30, 2009 was $65 million compared with $139 million for the
        corresponding period in the previous year.

    -   Cash flow from operating activities for the nine months ended
        September 30, 2009 was $316 million compared with $278 million for
        the corresponding period in the previous year.

    -   Net loss was $56 million on revenues of $350 million for the three
        months ended September 30, 2009 compared with net income of
        $76 million on revenues of $954 million for the corresponding period
        in the previous year.

    -   Net income was $98 million on revenues of $1,980 million for the nine
        months ended September 30, 2009 compared with $160 million on
        revenues of $2,618 million for the corresponding period in the
        previous year.

    -   Other comprehensive income was $9 million for the three months ended
        September 30, 2009 compared with $6 million for the corresponding
        period in the previous year.

    -   Other comprehensive income was $13 million for the nine months ended
        September 30, 2009 compared with $30 million for the corresponding
        period in the previous year.

    -   Investment in capital projects for the three months ended
        September 30, 2009 was $65 million compared with $171 million for the
        corresponding period in the previous year.

    -   Investment in capital projects for the nine months ended
        September 30, 2009 was $369 million compared with $465 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 electrical transmission and distribution networks, water and wastewater treatment facilities and infrastructure in Canada. 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
    September 30, 2009
    -------------------------------------------------------------------------
    

This management's discussion and analysis (MD&A), dated November 6, 2009, should be read in conjunction with the unaudited interim consolidated financial statements of EPCOR Utilities Inc. and its subsidiaries for the three and nine months ended September 30, 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 27. 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. EPCOR's distribution and transmission and water operations continued to deliver good results, and earnings from operating activities met our expectations for the third quarter. Water revenues from the City of Edmonton customer base benefited from rate increases on April 1, 2009 and higher sales volumes due to drier and warmer than normal weather conditions in the third quarter. Earnings from our water operations also benefitted from contributions from the Gold Bar Wastewater Treatment Plant (Gold Bar) operation which was transferred to EPCOR on March 31, 2009. Gold Bar systems and personnel are now substantially integrated with EPCOR operations.

On May 8, 2009, EPCOR announced its plans to create Capital Power Corporation and sell substantially all of its power generation assets and related operations to Capital Power Corporation and its subsidiaries (Capital Power), as described under Significant Events. The sale was effective early July 2009 and EPCOR's results for the third quarter were impacted by a loss on the sale of the power generation business and the changes in operations resulting from that sale.

Canadian and U.S. financial markets continued to stabilize in the third quarter of 2009. Narrower credit spreads on the notes which EPCOR received in exchange for its Canadian non-bank sponsored asset-backed commercial paper (ABCP) resulted in a $1 million increase in the fair value of the notes in the quarter. As described under Liquidity and Capital Resources, we applied the cash received from the sale of the power generation business in the quarter against our short-term borrowings.

SIGNIFICANT EVENTS

Sale of the power generation business

On May 8, 2009, EPCOR announced its plans to create Capital Power, a power generation company that is headquartered in Edmonton. The final prospectus for the initial public offering of 21,750,000 common shares of Capital Power, at $23.00 per common share, was filed with securities regulators in Canada on June 25, 2009. The initial public offering closed on July 9, 2009.

Through a series of transactions (the Reorganization), EPCOR sold substantially all of its power generation assets net of certain liabilities, and related operations including its 30.6% interest in EPCOR Power LP (Power LP), to Capital Power, effective early July 2009. The assets and related operations were previously included in EPCOR's Generation and Energy Services segments. EPCOR also entered into various agreements with Capital Power to provide for certain aspects of the separation of the power generation business from EPCOR, to provide for the continuity of operations and services and to govern the ongoing relationships between the two groups of entities.

The total consideration for the sale consisted of $468 million of cash, 56.6 million exchangeable limited partnership (LP) units of Capital Power LP (CPLP) and $896 million in long-term loans receivable from CPLP. In addition, EPCOR holds one special limited voting share in Capital Power providing the right to vote separately as a class in connection with certain amendments to the articles of Capital Power, including an amendment to change or permit the change of the location of the head office of Capital Power from the city of Edmonton.

Effectively, EPCOR sold 27.8% of its interest in the power generation business and through its equity investment in Capital Power, retains a 72.2% interest in that business. The difference between EPCOR's net carrying amount of its investment in the power generation business ($2,855 million) and the consideration received resulted in a loss on sale of $80 million including $37 million in direct expenses incurred in connection with the sale plus a $35 million income tax charge related to net future income tax assets that are not realizable by the Company as a result of the sale. Certain aspects of the sale related to the determination of minor assets and liabilities transferred to Capital Power have yet to be finalized. When these are finalized in the fourth quarter a change in the amount of the recognized loss on sale could result. However, the final amount of the loss is not expected to differ materially from the amount reported in the third quarter.

Immediately following completion of the Reorganization, EPCOR held 56.6 million exchangeable LP units of CPLP (exchangeable for common shares of Capital Power on a one-for-one basis) representing approximately 72.2% of CPLP, while Capital Power held the remaining 27.8%. Each exchangeable LP unit is accompanied by a special voting share of Capital Power which entitles the holder to a vote at Capital Power shareholder meetings, subject to the restriction that such voting shares must at all times represent not more than 49% of the votes attached to all Capital Power common shares and special voting shares together. The special shares also entitle EPCOR to elect a maximum of four out of twelve directors of Capital Power. As a result of these restrictive rights, EPCOR has significant influence, but not control, of Capital Power and therefore has used the equity method to account for its investment in CPLP.

Effective July 2009, income from Power LP has been included in the income from EPCOR's equity investment in CPLP as EPCOR no longer consolidates Power LP in its consolidated financial statements. Power LP is a subsidiary of CPLP.

EPCOR plans to eventually sell all or a substantial portion of its ownership interest in Capital Power subject to market conditions, requirements for capital and other circumstances that may arise in the future, and reinvest the proceeds from the share sales in EPCOR's utility infrastructure businesses, including water and wastewater treatment, and power transmission and distribution.

Asset-backed commercial paper exchanged for notes

On January 21, 2009, the restructuring of ABCP was implemented. 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 ABCP 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          Credit        Face amount
                                       Rating        ($ millions)
          -------------------------------------------------------------------
          MAV2         Class A-1       A                    $ 47          67%
                       Class A-2       BBB                     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. For the
          three and nine months ended September 30, 2009, EPCOR received $nil
          and $4 million respectively, of accrued interest on ABCP and
          interest on the new notes.
    

At September 30, 2009, the Company held $41 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 September 30, 2009, the fair value of the notes was estimated at $41 million compared with a fair value of $40 million and $42 million for the notes at June 30, 2009 and ABCP at December 31, 2008, respectively. The $1 million increase for the third quarter was primarily due to narrower indicative corporate credit spreads versus the Government of Canada yield curve. The $2 million decrease in the first half of the year was primarily due to lower short-term and higher long-term market interest rates which were taken into account in calculating the fair value of the notes, partly offset by narrower credit spreads. In 2008, $2 million and $11 million reductions in the fair value of the ABCP were recognized in the third quarter and first nine months, respectively.

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

Note on comparisons

For the first half of the year, EPCOR owned or controlled all of the power generation assets and related operations, including Power LP, that were sold to Capital Power in early July. Accordingly, net income, results of operations and variances for the first half of the year include all the power generation assets, results of operations and variances presented on a consolidated basis. After the sale of the power generation business and related operations in early July, we no longer controlled those operations. Consequently, the third quarter results, and results going forward, no longer present the power generation business and related operations on a consolidated basis. Those line items and variances are, in effect, replaced by the interest in Capital Power reported on the equity basis. In making year over year comparisons, variances include comparisons of power generation and related operations for the first half of 2009 to the first half of 2008, on an "apples to apples" basis. On the other hand, the third quarter of 2009 only reflects the equity interest in Capital Power while the third quarter in 2008 reflects the power generation business while it was still consolidated. In this context, the results of operations are discussed below.

    
    Net income

    -------------------------------------------------------------------------
    (Unaudited, $ millions)                                  Three      Nine
                                                            months    months
    -------------------------------------------------------------------------
    Net income for the periods ended September 30, 2008   $     76  $    160
    Loss on sale of power generation business                 (115)     (115)
    Equity income from Capital Power in 2009                    31        31
    Interest revenue in 2009 on long-term receivable
     from CPLP                                                  14        14
    Lower (higher) administration expenses, excluding
     administration expenses related to the power
     generation business                                         8       (11)
    Gold Bar operating income in 2009 excluding
     administration expenses                                     7        12
    Higher water rates and sales volumes, net of
     franchise fees                                              3        11
    Fair value changes on notes exchanged for ABCP               3        10
    Higher depreciation expenses, excluding depreciation
     expenses related to the power generation business          (1)       (5)
    Higher financing expenses                                  (22)      (11)
    Increases (decreases) related to the power generation
     business that was sold effective early July 2009          (56)        2
    Other                                                       (4)        -
    -------------------------------------------------------------------------
    Decrease in net income                                    (132)      (62)
    -------------------------------------------------------------------------
    Net (loss) income for the periods ended
     September 30, 2009                                   $    (56) $     98
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Results for the three and nine months ended September 30, 2009 were a net
loss of $56 million and net income of $98 million respectively, compared with
net income of $76 million and $160 million for the corresponding periods in
2008.
    Further explanations of the primary year over year variances are as
follows:

    -   Loss on sale of the power generation business reflects the difference
        between EPCOR's carrying amount of its investment in the power
        generation business sold and the consideration received for the
        business. This loss includes income tax related charges to recognize
        unrealizable future income tax assets and direct expenses incurred in
        connection with the sale.

    -   Administration expenses were lower in the third quarter of 2009
        compared with the corresponding period in 2008 due to lower staffing
        levels in corporate services due to the sale of the power generation
        business. Administration expenses across all business segments
        excluding Power LP, were higher in the first half of 2009 compared
        with the first half of 2008 due to increased costs related to the
        Reorganization.

    -   The Gold Bar operation was transferred to EPCOR from the City of
        Edmonton on March 31, 2009 and contributed $7 million and $12 million
        of operating income before administration expenses in the third
        quarter and year-to-date, respectively.

    -   Water rates were higher in the three and nine months ended
        September 30, 2009 compared with the corresponding periods in 2008
        primarily due to increased rates under the performance-based rate
        tariff (PBR) as approved by The City of Edmonton. Water sales volumes
        were also higher due to drier weather conditions in the second and
        third quarters of 2009 compared with the corresponding periods in
        2008.

    -   In the first nine months of 2009, the fair value of the notes
        exchanged for ABCP decreased $1 million due to lower short-term and
        higher long-term market interest rates in the first quarter, mostly
        offset in the second and third quarters by the effect of narrower
        credit spreads, which are taken into account in calculating the fair
        value of the notes. In the third quarter of 2009, the fair value
        increased $1 million. In the three and nine months ended
        September 30, 2008, the fair value of EPCOR's ABCP decreased
        $2 million and $11 million, respectively.

    -   Depreciation expense was higher in the three and nine months ended
        September 30, 2009 compared with the corresponding periods in 2008
        due to regulated water and distribution and transmission asset
        additions.

    -   Financing expenses were higher in the three months ended
        September 30, 2009 compared with the corresponding period primarily
        due to the write-off of issue costs for the syndicated and bilateral
        credit facilities that were cancelled in July as a result of the
        Reorganization, minimal capitalized interest recognized in the third
        quarter of 2009 compared with the corresponding period in 2008,
        higher interest expenses due to the addition of the Gold Bar facility
        in 2009 and lower sinking fund earnings in 2009 compared with 2008.

        The higher financing expenses in the nine months ended September 30,
        2009 compared with the corresponding period in 2008 primarily were
        due to the same factors that affected the quarters ended
        September 30, 2008 and 2009 except that capitalized interest was
        higher for the nine months ended September 30, 2009 compared with the
        same period in 2008. The Company capitalized borrowing costs as part
        of its capital construction projects and in the first half of 2009,
        construction work-in-progress for Keephills 3 and the Clover Bar
        Energy Centre was higher compared with the corresponding periods in
        2008. No activity on these projects occurred in the third quarter of
        2009 as these projects were sold to Capital Power as a result of the
        Reorganization.

    -   Net income increases (decreases) related to the power generation
        business reflect numerous differences in the first half of 2009 and
        three months ended September 30, 2009 compared with the corresponding
        periods in 2008 associated with the power generation business that
        was sold at the beginning of the third quarter. The most significant
        net income differences relate to unrealized fair value changes,
        availability incentive income, maintenance expenses for Genesee
        scheduled turnarounds in 2008, income from Power LP and
        administration expenses. See Segment Results - Generation.

    Revenues

    -------------------------------------------------------------------------
    (Unaudited, $ millions)                                  Three      Nine
                                                            months    months
    -------------------------------------------------------------------------
    Revenues for the periods ended September 30, 2008     $    954  $  2,618
    Gold Bar revenue in 2009                                    15        28
    Interest revenue in 2009 on long-term receivable
     from CPLP                                                  14        14
    Higher water rates and sales volumes                         3        11
    Lower Water Services' commercial and transportation
     services activity                                         (22)      (10)
    Lower regulated rate tariff (RRT) electricity revenues     (35)      (76)
    Revenue decreases prior to the sale of the power
     generation business                                         -       (22)
    Sale of power generation business in early July 2009      (581)     (581)
    Other                                                        2        (2)
    -------------------------------------------------------------------------
    Decrease in revenues                                      (604)     (638)
    -------------------------------------------------------------------------
    Revenues for the periods ended September 30, 2009     $    350  $  1,980
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Consolidated revenues were lower for the three and nine months ended
September 30, 2009 compared with the corresponding periods in 2008 due to the
net impact of the following and should be read in conjunction with the Note on
comparisons:

    -   Water Services' commercial and transportation services revenues were
        lower in the three and nine months ended September 30, 2009 compared
        with the corresponding periods in 2008 primarily due to reduced
        commercial water plant and distribution system construction activity
        in 2009, partly offset by increased construction activity for street
        lighting, signals and light rail transit overhead wires for the City
        of Edmonton in 2009.

    -   Regulated electricity revenues were lower in the three and nine
        months ended September 30, 2009 compared with the corresponding
        periods in 2008 primarily due to lower electricity prices in 2009
        compared with 2008.

    -   Revenue decreases related to the power generation business reflect
        numerous differences in the first half of 2009 compared with the
        corresponding period in 2008 associated with the power generation
        business that was sold effective July 1, 2009. The most significant
        revenue differences relate to trading activities in the Western U.S.,
        natural gas sales, unrealized fair value changes and availability
        incentive revenue.

    -   Sale of the power generation business reflects the revenues of this
        business in the third quarter of 2008. The largest revenue items
        related to that quarter were for Power LP, unrealized fair value
        changes, natural gas sales and Alberta electricity sales.

    Capital spending and investment

    -------------------------------------------------------------------------
    (Unaudited, $ millions)
    Nine months ended September 30                            2009      2008
    -------------------------------------------------------------------------
    Generation                                            $    228  $    306
    Distribution and Transmission                               56        94
    Energy Services                                              7         5
    Water Services                                              64        50
    Corporate - other                                           14        10
    -------------------------------------------------------------------------
                                                          $    369  $    465
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Capital expenditures for property, plant and equipment were lower for the nine months ended September 30, 2009 compared with the corresponding period in 2008 primarily due to capital spending on Keephills 3 and Clover Bar Energy Centre in the third quarter of 2008, 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 and for the E.L. Smith water treatment plant upgrade in Water Services which was completed in the second quarter of 2008.

These decreases in spending were partly offset by capital expenditures on the Gold Bar plant in 2009.

There was no capital spending for the Generation segment and lower capital spending in the Energy Services segment in the third quarter of 2009 compared with the corresponding period in 2008 due to the sale of the power generation business.

    
    SEGMENT RESULTS

    Generation

    -------------------------------------------------------------------------
    Generation results (including
     intersegment transactions)       Three months ended   Nine months ended
    (Unaudited, $ millions)               September 30        September 30
    -------------------------------------------------------------------------
                                          2009      2008      2009      2008

    Revenues                          $      -  $    257  $    515  $    712
    Expenses                                 -       367       428       617
    -------------------------------------------------------------------------
    Operating income (loss)           $      -  $   (110) $     87  $     95
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (Unaudited, $ millions)                                  Three      Nine
                                                            months    months
    -------------------------------------------------------------------------
    Operating income (loss) for the periods ended
     September 30, 2008                                   $   (110) $     95
    Sale of power generation business in early July 2009       110       110

    Increases/(decreases) prior to the sale of the
     power generation business in early July 2009:
     ---------------------------------------------
    Higher Genesee Power Purchase Arrangement (PPA)
     availability incentive income                               -        42
    Maintenance expenses for Genesee scheduled
     turnarounds in 2008                                         -        26
    Lower realized foreign exchange expense                      -         8
    Gain on sale of portfolio investments in 2008                -        (4)
    Unrealized fair value changes on derivative
     instruments                                                 -        (5)
    Higher administration expenses                               -       (18)
    Lower Power LP operating income                              -      (160)
    Other                                                        -        (7)
    -------------------------------------------------------------------------
    Increase (decrease) in operating income                    110        (8)
    -------------------------------------------------------------------------
    Operating income for the periods ended
     September 30, 2009                                   $      -  $     87
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Generation's operating income for the three and nine months ended
September 30, 2009 increased $110 million and decreased $8 million,
respectively, compared with the corresponding periods in 2008. Further
information on the year-over-year changes is as follows and should be read in
conjunction with the Note on comparisons:

    -   Sale of the power generation business variance reflects the sale of
        substantially all of the generation segment as part of the
        Reorganization. The operating income for this segment for the three
        months ended September 30, 2008 reflected that EPCOR still controlled
        the generation operations, including Power LP, and reflected
        unrealized losses on the change in fair value of natural gas
        contracts and unrealized losses on the translation of Power LP's U.S.
        dollar debt due to a strengthening U.S. dollar in the third quarter
        of 2008.

    -   Generation's revenues and operating income increased $42 million in
        the first half of 2009 due to availability incentive income earned
        under the terms of the Genesee 1 and 2 PPA compared with a net
        availability penalty in the corresponding period in 2008. There were
        scheduled turnarounds for required maintenance at Genesee 1 in the
        first quarter of 2008 and at all three Genesee units in the second
        quarter of 2008 whereas plant availability at Genesee 1 and 2 was
        above plan in the first two quarters of 2009. The back-to-back timing
        of the maintenance turnarounds in 2008 was required to accommodate
        the Alberta Electric System Operator's upgrade of the new high-
        voltage transmission lines in the Genesee and Keephills area.

    -   Foreign exchange gains were realized in the first half 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.

    -   The unrealized changes in the fair value of the forward foreign
        exchange contracts for equipment purchases for Clover Bar Energy
        Centre and Keephills 3 were losses in the first half of 2009 due to a
        weakening U.S. dollar compared with gains in the corresponding period
        in 2008 due to a strengthening U.S. dollar. This unfavourable
        variance was partly offset by a smaller decrease in the fair value of
        the Joffre contract-for-differences due to a smaller decrease in the
        forward spark spread in the first half of 2009 compared with the
        first half of 2008. Spark spread is the theoretical difference
        between the price of electricity as the output and its energy cost of
        production.

    -   Administration expenses increased in the six months ended June 30,
        2009 compared with the corresponding period in 2008 due to costs for
        the Reorganization and increased spending on business development
        activities and on the Genesee Integrated Gasification Combined Cycle
        and Carbon Capture Sequestration technology project.

    -   Power LP contributed $22 million in the first six months of 2009
        compared with $182 million in the corresponding period in 2008. The
        year-over-year decreases include unrealized changes of $175 million
        in the fair value of natural gas supply and foreign exchange
        contracts for the six month period.

        The decreases in operating income were partly offset by foreign
        exchange losses recognized in 2008. In the fourth quarter of 2008,
        Power LP re-evaluated the functional currency of its U.S.
        subsidiaries and determined it to be U.S. dollars rather than
        Canadian dollars. Accordingly, gains and losses on foreign currency
        translation are recorded in other comprehensive income commencing in
        the fourth quarter of 2008. Power LP reported net foreign exchange
        losses of $11 million in the first half of 2008.

        Power LP's revenues increased $29 million for the first half of 2009
        compared with the corresponding periods in the prior year, primarily
        due to unrealized changes in the fair value of forward foreign
        exchange contracts for U.S. dollars used to economically hedge
        operating cash flows. Year-over-year changes in plant revenues were
        insignificant as the revenue from the Morris operation in 2009 was
        offset by lower revenue from the California plants due to lower
        electricity prices which, under the terms of the PPA, were driven by
        lower natural gas prices.

        Power LP's expenses increased $189 million in the first half of 2009
        compared with the corresponding period in the prior year. The year-
        over-year increase included unrealized changes in the fair value of
        natural gas supply contracts of $202 million for the six month
        period. These unrealized fair value changes were included in fuel
        expense and were due to decreases in the forward market prices for
        natural gas in the first half of 2009 compared with increases in the
        first half of 2008. Operating expenses for the Morris facility also
        contributed to the increase in Power LP's expenses. These increases
        were partly offset by the foreign exchange losses in the first half
        of 2008 with no corresponding amounts included in net income in 2009,
        and decreased fuel costs at the California plants due to lower
        natural gas prices in the first half of 2009 compared with the first
        half of 2008.

    Distribution and Transmission

    -------------------------------------------------------------------------
    Distribution and Transmission
     results (including intersegment
     transactions)                    Three months ended   Nine months ended
    (Unaudited, $ millions)               September 30        September 30
    -------------------------------------------------------------------------
                                          2009      2008      2009      2008

    Revenues                          $     60  $     59  $    179  $    177
    Expenses                                46        45       147       145
    -------------------------------------------------------------------------
    Operating income                  $     14  $     14  $     32  $     32
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    There were no material changes in Distribution and Transmission revenues,
expenses and operating income, for the three and nine months ended September
30, 2009 compared with the corresponding periods in 2008.

    Energy Services

    -------------------------------------------------------------------------
    Energy Services results
     (including intersegment
     transactions)                    Three months ended   Nine months ended
    (Unaudited, $ millions)               September 30        September 30
    -------------------------------------------------------------------------
                                          2009      2008      2009      2008

    Revenues                          $    213  $    608  $  1,183  $  1,703
    Expenses                               204       532     1,082     1,621
    -------------------------------------------------------------------------
    Operating income (loss)           $      9  $     76  $    101  $     82
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (Unaudited, $ millions)                                  Three      Nine
                                                            months    months
    -------------------------------------------------------------------------
    Operating income for the periods ended
     September 30, 2008                                   $     76  $     82
    Higher billing charge revenues in 2009                       -         2
    Administration related to ongoing EPCOR operations           -        (5)
    Sale of power generation business in early July 2009       (71)      (71)

    Increases/(decreases) prior to the sale of the
     power generation business in early July 2009:
     ---------------------------------------------
    Unrealized fair value changes in derivative
     instruments and natural gas inventory                       -       106
    Higher natural gas margins                                   -         6
    Higher administration expenses                               -        (7)
    Lower Alberta electricity margins                            -       (19)
    Other                                                        4         7
    -------------------------------------------------------------------------
    (Decrease) increase in operating income                    (67)       19
    -------------------------------------------------------------------------
    Operating income for the periods ended
     September 30, 2009                                   $      9  $    101
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Energy Services' operating income decreased $67 million for the quarter
and increased $19 million for the nine months ended September 30, 2009
compared with the corresponding periods in 2008 due to the net impact of the
following and should be read in conjunction with the Note on comparisons:

    -   Billing charge revenues were higher in 2009 compared with 2008
        primarily due to higher rates as approved by the Alberta Utilities
        Commission. These revenues reflect the recovery of administrative
        costs from RRT customers for the provision of customer billing
        services.

    -   The decreases due to the sale of the power generation business
        reflect the sale of a significant portion of the Energy Services
        segment as part of the Reorganization. The operating income for this
        portion of the segment for the three months ended September 30, 2008
        reflected EPCOR in control of the generation operations, including
        Power LP, and reflected positive margins for Alberta electricity,
        natural gas, trading activities in Ontario and the north eastern U.S.
        and unrealized fair value gains due to a net short position combined
        with decreasing forward electricity prices. These favourable results
        were partly offset by an unrealized fair value loss on natural gas
        inventory due to decreasing forward natural gas prices.

    -   The unrealized fair value changes for the first half of 2009 compared
        with the first half of 2008 relate primarily to a net short position
        in both years for derivative electricity contracts that were not
        designated as hedges for accounting purposes. In the first half of
        2009, forward Alberta power prices decreased which increased the fair
        value of these contracts whereas in the corresponding period of 2008,
        forward Alberta power prices increased which reduced the fair value
        of these contracts. These unrealized fair value changes increased
        energy revenues and energy purchases by $137 million and $31 million
        respectively, in the first half of 2009 compared with the first half
        of 2008. As a result of the sale of the power generation business the
        Company is no longer exposed to fair value adjustments related to
        energy contracts or natural gas inventory.

    -   Natural gas margins in the first half of 2009 compared with the first
        half of 2008 were higher primarily due to gains realized on sales of
        storage gas in the first half of 2009 compared with losses in the
        first half of 2008 and increased margins from our speculative natural
        gas portfolio. Natural gas revenues and purchases decreased
        $165 million and $171 million respectively, in the first half of 2009
        compared with the corresponding period in 2008 primarily due to lower
        physical natural gas trading activities, lower natural gas
        consumption due to fewer wholesale and merchant customers and lower
        natural gas prices.

    -   Administration expenses increased in the six months ended June 30,
        2009 compared with the corresponding period in 2008 primarily due to
        costs incurred for the Reorganization.

    -   In the first half of 2009, energy revenues and expenses from our
        Alberta electricity portfolio decreased $53 million and $34 million
        respectively, compared with the first half of 2008 due to the impact
        of reduced Alberta power prices on the portfolio, our reduced
        interest in the Battle River Power Syndicate Agreement (PSA), and
        lower pricing and volumes for our RRT business. The portfolio was in
        a net long position 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. The decrease in
        power generation resulting from our reduced interest in the Battle
        River PSA was partly offset by increased generation from Genesee 3.
        The impact of lower revenues on the energy margins for our RRT
        business was minimal.

    -   Decreased trading activities in the western U.S., north eastern U.S.
        and Ontario in the first half of 2009 compared with the corresponding
        period in 2008 reduced revenues by $47 million, but had minimal
        impact on energy margins.

    Water Services

    -------------------------------------------------------------------------
    Water Services results
     (including intersegment
     transactions)                    Three months ended   Nine months ended
    (Unaudited, $ millions)               September 30        September 30
    -------------------------------------------------------------------------
                                          2009      2008      2009      2008

    Revenues                          $     94  $     98  $    253  $    226
    Expenses                                67        76       200       178
    -------------------------------------------------------------------------
    Operating income                  $     27  $     22  $     53  $     48
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (Unaudited, $ millions)                                  Three      Nine
                                                            months    months
    -------------------------------------------------------------------------
    Operating income for the periods ended
     September 30, 2008                                   $     22  $     48
    Increased water rates and sales volumes, net
     of franchise fees                                           3        11
    Gold Bar operating income excluding administration
     expenses in 2009                                            7        12
    Higher administration expenses                              (8)      (17)
    Other                                                        3        (1)
    -------------------------------------------------------------------------
    Increase in operating income                                 5         5
    -------------------------------------------------------------------------
    Operating income for the periods ended
     September 30, 2009                                   $     27  $     53
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Water Services' operating income increased $5 million in the third quarter
and first nine months of 2009 compared with the corresponding periods of the
prior year due to the net impact of the following:

    -   Revenues from water sales, net of franchise fees, were higher in the
        three and nine months ended September 30, 2009 compared with the
        corresponding periods in 2008, primarily due to increased rates
        effective April 1, 2008 and April 1, 2009 under Water Services'
        Performance Based Rate structure as approved by its regulator, The
        City of Edmonton, and increased sales volumes due to drier weather
        conditions in the second and third quarters of 2009.

    -   The Gold Bar operation, which was transferred from the City of
        Edmonton on March 31, 2009, contributed $15 million in revenues and
        $8 million in expenses in the third quarter.

    -   Administration expenses increased in the first nine months of 2009
        due to costs related to the Reorganization and the Gold Bar
        operation.
    

Transportation and other commercial services revenues were $22 million and $10 million lower in the third quarter and nine months ended September 30, 2009 compared with the corresponding periods in 2008 primarily due to reduced construction activity as a result of completion of projects for the towns of Chestermere, Wetaskiwin, Taber and Canmore as well as Suncor Voyageur. The decrease in revenues, offset by equivalent decreases in construction expenses, had minimal impact on operating income. Revenues related to the construction and maintenance of street lighting, signals and light rail transit overhead wires for the City of Edmonton were higher in the third quarter and nine months ended September 30, 2009 compared with the corresponding periods in 2008 due to increased activity. This revenue increase was offset by increased labour and business development expenses.

A higher incidence and cost of water distribution main breaks in the nine months ended September 30, 2009 compared with the corresponding period in 2008 also contributed to higher expenses in Water Services.

    
    CONSOLIDATED BALANCE SHEETS

    -------------------------------------------------------------------------
                    September  December  Increase
    ($ millions)     30, 2009  31, 2008 (decrease)    Explanation
    -------------------------------------------------------------------------
    Cash and cash       $  22     $ 111     $ (89)    Refer to liquidity and
     equivalents                                      capital resources
                                                      section.
    -------------------------------------------------------------------------
    Accounts receivable   243       503      (260)    Sale of the power
     (including income                                generation business
     taxes recoverable)                               partly offset by
                                                      receivables related to
                                                      Gold Bar sales.
    -------------------------------------------------------------------------
    Current portion       254         6       248     Reflects current
     of long-term                                     portion of the long-
     receivables                                      term receivable from
                                                      CPLP and the
                                                      reclassification of a
                                                      commercial water loan
                                                      receivable from long-
                                                      term.
    -------------------------------------------------------------------------
    Derivative              -       130      (130)    Sale of the power
     instruments                                      generation business.
     assets (current)
    -------------------------------------------------------------------------
    Other current assets   28        96       (68)    Sale of the power
                                                      generation business,
                                                      2008 balance primarily
                                                      reflects generation
                                                      plant inventories.
    -------------------------------------------------------------------------
    Property, plant     1,725     4,639    (2,914)    Sale of the power
     and equipment                                    generation business and
                                                      depreciation and
                                                      amortization expenses
                                                      in the current year,
                                                      offset by 2009 capital
                                                      additions and Gold Bar
                                                      assets.
    -------------------------------------------------------------------------
    Power purchase          -       550      (550)    Sale of the power
     arrangements (PPAs)                              generation business.
    -------------------------------------------------------------------------
    Contract and          110       296      (186)    Sale of the power
     customer rights                                  generation business and
     and other                                        amortization of RRT
     intangible assets                                customer rights.
    -------------------------------------------------------------------------
    Long-term           1,472         -     1,472     Reflects the Company's
     investment                                       72.2% equity interest
                                                      in CPLP received on
                                                      sale of power
                                                      generation business.
    -------------------------------------------------------------------------
    Derivative              -        75       (75)    Sale of the power
     instruments                                      generation business.
     assets
     (non-current)
    -------------------------------------------------------------------------
    Future income          30       103       (73)    Sale of the power
     tax assets                                       generation business.
     (non-current)
    -------------------------------------------------------------------------
    Goodwill                2       161      (159)    Sale of the power
                                                      generation business.
    -------------------------------------------------------------------------
    Long-term             643       102       541     Reflects long-term
     receivables                                      portion of the long-
                                                      term receivable from
                                                      CPLP established on the
                                                      sale of the power
                                                      generation business.
    -------------------------------------------------------------------------
    Other assets           75       133       (58)    Sale of the power
                                                      generation business.
    -------------------------------------------------------------------------
    Assets held             -        43       (43)    Decrease due to the
     for sale                                         sale of the power
                                                      generation business.
                                                      2008 balance reflects
                                                      the portion of the
                                                      Battle River PSA held
                                                      for sale.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                    September  December  Increase
    ($ millions)     30, 2009  31, 2008 (decrease)    Explanation
    -------------------------------------------------------------------------
    Short-term debt     $  19     $ 140     $(121)    Repayment of bankers'
                                                      acceptances and
                                                      commercial paper
    -------------------------------------------------------------------------
    Accounts payable      289       587      (298)    Sale of the power
     and accrued                                      generation business
     liabilities                                      partly offset by the
                                                      current portion of the
                                                      transfer fee payable to
                                                      the City of Edmonton
                                                      for the Gold Bar
                                                      transfer.
    -------------------------------------------------------------------------
    Derivative              -       131      (131)    Sale of the power
     instruments                                      generation business.
     liabilities
     (current)
    -------------------------------------------------------------------------
    Other current          17        58       (41)    Sale of the power
     liabilities                                      generation business.
    -------------------------------------------------------------------------
    Long-term debt      1,734     2,728      (994)    Sale of power
     (including                                       generation business
     current portion)                                 including the long-term
                                                      debt outstanding of
                                                      EPCOR Power LP.
    -------------------------------------------------------------------------
    Derivative              -       110      (110)    Sale of the power
     instruments                                      generation business.
     liabilities
     (non-current)
    -------------------------------------------------------------------------
    Other non-current      85       125       (40)    Sale of the power
     liabilities                                      generation business
                                                      partly offset by the
                                                      non-current portion of
                                                      the transfer fee owing
                                                      to the City of Edmonton
                                                      for the Gold Bar asset
                                                      transfer.
    -------------------------------------------------------------------------
    Future income           -       100      (100)    Sale of the power
     tax liabilities                                  generation business.
     (non-current)
    -------------------------------------------------------------------------
    Non-controlling         -       540      (540)    Balance decreased due
     interests                                        to the sale of the
                                                      power generation
                                                      business and
                                                      recognition of interest
                                                      in Power LP on an
                                                      equity basis included
                                                      in equity interest of
                                                      CPLP.
    -------------------------------------------------------------------------
    Shareholder's       2,460     2,429        31     Reflects net income,
     equity                                           other comprehensive
                                                      income and the Gold Bar
                                                      asset capital
                                                      contribution partly
                                                      offset by common share
                                                      dividends.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    LIQUIDITY AND CAPITAL RESOURCES

    -------------------------------------------------------------------------
    Cash inflows (outflows)
    -------------------------------------------------------------------------
                          Three months
                             ended
                          September 30
                        ---------------- Increase
    ($ millions)         2009      2008 (decrease)    Explanation
    -------------------------------------------------------------------------
    Operating           $  65     $ 139     $ (74)    Lower cash receipts in
                                                      2009 due to the sale of
                                                      the power generation
                                                      business, partly offset
                                                      by the receipt of
                                                      interest revenue on the
                                                      long-term receivable
                                                      from CPLP.

    Investing             439      (165)      604     Proceeds on the
                                                      disposal of the power
                                                      generation business in
                                                      2009 and lower payments
                                                      for capital
                                                      expenditures in 2009.

    Financing            (563)       45      (608)    Net financing outlays
                                                      in 2009 included the
                                                      repayment of
                                                      $468 million in
                                                      commercial paper and
                                                      banker's acceptances as
                                                      well as ongoing debt
                                                      repayments. Net
                                                      financing receipts in
                                                      2008 included the
                                                      issuance of
                                                      $113 million of
                                                      commercial paper and
                                                      bankers' acceptances
                                                      partly offset by
                                                      ongoing long-term debt
                                                      repayments.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Cash inflows (outflows)
    -------------------------------------------------------------------------
                          Nine months
                             ended
                          September 30
                        ---------------- Increase
    ($ millions)         2009      2008 (decrease)    Explanation
    -------------------------------------------------------------------------
    Operating           $ 316     $ 278     $  38     Receipt of interest
                                                      revenue on the long-
                                                      term receivable from
                                                      CPLP in 2009 and
                                                      payment in 2008 of
                                                      income taxes related to
                                                      the 2006 gain on sale
                                                      of the Battle River
                                                      PSA. These cash
                                                      increases are partly
                                                      offset by reduced cash
                                                      receipts as a result of
                                                      the sale of the power
                                                      generation business.

    Investing             153      (386)      539     Proceeds on the
                                                      disposal of the power
                                                      generation business in
                                                      2009 and lower payments
                                                      for capital
                                                      expenditures in 2009,
                                                      partly offset by the
                                                      payment of a Gold Bar
                                                      transfer fee
                                                      installment in 2009.

    Financing            (561)      176      (737)    Net financing outlays
                                                      in 2009 included
                                                      $120 million in net
                                                      repayments of bankers'
                                                      acceptances, commercial
                                                      paper and U.S. dollar
                                                      bank loans and
                                                      repayment of
                                                      $224 million of long-
                                                      term debt that was
                                                      outstanding under the
                                                      syndicated bank credit
                                                      facility, and other
                                                      ongoing debt
                                                      repayments. Net
                                                      financing receipts in
                                                      2008 included the
                                                      issuance of
                                                      $600 million of medium-
                                                      term note debentures
                                                      and net proceeds from
                                                      the issuance of
                                                      commercial paper,
                                                      partly offset by
                                                      repayment of
                                                      $200 million of medium-
                                                      term note debentures
                                                      and $155 million of
                                                      long-term debt that was
                                                      outstanding under the
                                                      syndicated bank credit
                                                      facility, and ongoing
                                                      long-term debt
                                                      repayments.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

The Company's cash from operating activities decreased $74 million and increased $38 million in the three and nine months ended September 30, 2009 respectively, compared with the corresponding periods in 2008. Over the next few quarters, we anticipate funds from operations to decrease from 2008 due to the absence of the power generation business which was sold to Capital Power in early July 2009. The Company plans to finance its working capital requirements with existing credit facilities and the issuance of commercial paper.

On July 9, 2009, cash proceeds of approximately $468 million received on the sale of the power generation business to Capital Power increased cash flow from investing activities. Of the proceeds received, approximately $424 million was used to repay bankers' acceptances and $44 million was used to repay commercial paper indebtedness. In addition, EPCOR received approximately $18 million in partnership distributions in October 2009 on its 56.6 million exchangeable LP units of CPLP. EPCOR expects to receive a similar amount in future quarters.

On July 9, 2009, EPCOR received $896 million in long-term loans receivable from CPLP as part of the consideration on the sale of the power generation business. These long-term loans receivable provide for principal with interest payments that will be sufficient to meet certain debt obligations to the City of Edmonton. The loans will be repaid at various dates extending out to June 30, 2018. On September 30, 2009, the Company received approximately $39 million from CPLP in respect of the first scheduled loan repayment.

At September 30, 2009, the Company had undrawn amounts available of $446 million under three credit facilities including a $500 million syndicated bank credit facility. This facility has two tranches of $250 million each. One $250 million tranche is available and committed for approximately 1.5 years and a second $250 million tranche with $158 million available is committed for approximately 3.5 years. These amounts exclude Power LP's credit facilities as it was sold with the power generation business and is no longer consolidated in EPCOR's financial statements. In conjunction with the Reorganization, on July 9, 2009 the Company terminated its $600 million syndicated bank credit facility and renegotiated its $800 million syndicated bank credit facility to $500 million. The changes to the syndicated bank credit facility required increases to borrowing costs to reflect current market conditions. In addition, the Company's five bilateral bank credit facilities totalling $490 million were cancelled as they were no longer required with the reduced scope of operations following the sale of the power generation business.

Committed bank lines of credit are also used to provide letters of credit. At September 30, 2009, the Company had letters of credit of $95 million (December 31, 2008 - $253 million) outstanding to meet the credit requirements of energy market participants and conditions of certain service agreements. The committed bank lines also indirectly back the Company's commercial paper program which has an authorized capacity of $225 million, of which $19 million was outstanding at September 30, 2009 (December 31, 2008 - $113 million).

The Company's financing requirements for capital projects have decreased as a result of the sale of the power generation business to Capital Power in early July 2009. Capital expenditures are expected to be approximately $183 million over the last quarter of the year which will be financed with existing credit facilities or the issuance of medium-term notes. Included in this estimate, is the acquisition, under a sale leaseback arrangement, of potable water and wastewater treatment plant assets from Suncor Energy for approximately $100 million. See Subsequent Event.

The Company's contractual obligations in 2010 of $487 million, as noted in Contractual Obligations, will be funded from operating cash flows, partnership distributions from CPLP, interest and principal payments related to the long-term receivable from CPLP, and the Company's credit facilities or medium term notes. The payments from CPLP comprise a significant amount of the cash required to fund the Company's 2010 contractual obligations. Should CPLP be unable to fulfill its obligations to EPCOR in 2010, the Company will rely more heavily on its credit facilities to fund its obligations in 2010.

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. At September 30, 2009, the available amount remaining under this shelf prospectus was $400 million. The shelf prospectus expires in November 2009, but is expected to be renewed in the fourth quarter of 2009.

Effects of economic downturn and market uncertainty

Canadian and U.S. financial markets continued to stabilize in the third quarter of 2009. The Company secured financing to fund its capital expenditures and working capital requirements at a weighted average interest rate of 0.35% through the issue of commercial paper and bankers' acceptances in the quarter. The Company plans to continue using commercial paper, existing credit facilities or medium-term notes for its financing requirements for the balance of the year. Should instability in the credit and economic environments worsen, it may adversely affect the interest rates at which we are able to borrow.

Notwithstanding the limited signs of improvement in the global economy, if the economy were to deteriorate in the longer term, particularly as they relate to Canada and the U.S., this 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 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 honour its obligations. Some of these considerations include the preservation of capital through capital expenditure reduction or deferral, operating cost reductions and sale of exchangeable LP units of CPLP where permitted by market conditions and the terms and conditions of the Reorganization.

CONTRACTUAL OBLIGATIONS

During the third quarter, the Company financed its capital expenditures and working capital requirements through its credit facilities and commercial paper program. The Company's outstanding short-term debt decreased $449 million in the third quarter and $121 million in the first nine months of 2009.

Prior to the sale of the power generation business to Capital Power the Company had issued parental guarantees on behalf of former subsidiaries to meet the credit requirements of energy market participants, to meet conditions of certain service agreements, and to satisfy legislated reclamation requirements. At September 30, 2009, the Company continues to have outstanding parental guarantees on behalf of Capital Power totaling $1,315 million. The Company also has outstanding parental guarantees which do not have a defined limit, but which provide full support for any positions related to power purchase arrangements of Capital Power. The Company and Capital Power are working to expeditiously transfer the guarantees to Capital Power and Capital Power has indemnified EPCOR for any draws on such guarantees.

On March 31, 2009, EPCOR issued $112 million of long-term debt to the City of Edmonton and incurred a $75 million transfer fee payable to the City of Edmonton for the Gold Bar asset transfer. The long-term debt bears interest at a weighted average interest rate of approximately 5.22% and matures over the period from 2010 to 2033 as follows:

    
    -------------------------------------------------------------------------
    (Unaudited, $ millions)
    -------------------------------------------------------------------------
    2009                                                               $   6
    2010                                                                   6
    2011                                                                   6
    2012                                                                   5
    2013 to 2033                                                          89
    -------------------------------------------------------------------------
    Total                                                              $ 112
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

The transfer fee is payable in annual instalments 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.

There have been no other material changes to the Company's purchase obligations, including payments for the next five years and thereafter, during the third quarter. However, a significant portion of EPCOR's contractual obligations were transferred to Capital Power or extinguished in conjunction with the sale of the power generation business and Reorganization effective early July 2009. Accordingly, EPCOR's contractual obligations at September 30, 2009 adjusted for the transactions relating to the Reorganization were as follows:

    
    -------------------------------------------------------------------------
                                   Due between             Due after
                   Due  ---------------------------------- more than
                within    1 and    2 and    3 and    4 and      five
    $ millions  1 year  2 years  3 years  4 years  5 years     years   Total
    -------------------------------------------------------------------------
    Capital
     projects
     (1)       $    51  $    17  $     -  $     -  $     -  $     -  $    68

    Water and
     wastewater
     infra-
     structure
     projects(2)    25       16       12       10        6        1       70

    Long-term
     debt(3)       230       24      216       14       11    1,252    1,747

    Interest on
     long-term
     debt          155      127      102       86       81      881    1,432

    Short-term
     debt           19        -        -        -        -        -       19

    Asset
     retirement
     obligations(4)  5       14        -        -        -        -       19

    Operating
     leases          2        2        9       11       11      186      221
    -------------------------------------------------------------------------
    Total      $   487  $   200  $   339  $   121  $   109  $ 2,320  $ 3,576
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) EPCOR's obligations for capital projects include obligations for
        various Distribution and Transmission and Water Services' projects.
    (2) EPCOR's obligations for water and wastewater infrastructure projects
        include obligations for the town of Chestermere project and the
        transfer fee related to the purchase of Gold Bar from the City of
        Edmonton.
    (3) Obligations assumed by EPCOR upon transfer of Gold Bar from the City
        of Edmonton are included. The transfer fee obligation is included in
        water and wastewater infrastructure projects above. Long-term
        receivable obligations due from CPLP, which serve to offset the
        stated amount of long-term debt owing to The City, are not reflected
        in the above table.
    (4) EPCOR's asset retirement obligations reflect the undiscounted cash
        flow required to settle obligations for the retirement of the
        Rossdale generating plant.
    

The long-term debt and interest on long-term debt in the above table include amounts for EPCOR's public debentures and obligations to the City of Edmonton.

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 Section 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. These amendments have been adopted by the Company commencing January 1, 2009. The Company's adoption of the amendment did not have a material impact in the interim consolidated financial statements.

As permitted by Canadian GAAP, the Company is applying standards issued by the Financial Accounting Standards Board in the U.S. as another source of Canadian GAAP. The U.S. Statement of Financial Accounting Standards No. 71 - Accounting for the Effects of Certain Types of Regulation (FAS 71) allows for the recognition and measurement of rate regulated assets and liabilities.

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. The development of the financial statement presentation will evolve throughout the project as the impacts of implementing the various standards are quantified.

Systems Updates

Systems 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. We completed our system updates in the third quarter of 2009 to capture both and are implementing the operational procedures to capture the applicable accounting data through 2010.

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. Assessments of most agreements have been completed and will continue to be monitored as IFRS differences are quantified.

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.

Disclosures about financial instruments

In June 2009, the CICA amended Handbook Section 3862 Financial Instruments - Disclosures, to adopt the amendments recently made by the International Accounting Standards Board to IFRS 7 Financial Instruments: Disclosures. The amendments require enhanced disclosures about fair value measurements, including the relative reliability of the inputs used in those measurements, and about the liquidity risk of financial instruments. Although the amendments apply to financial statements relating to fiscal years ending after September 30, 2009, comparative information is not required in the first year of application. We will assess the impacts of these amendments on our financial statements and implement the necessary additional disclosures commencing with the annual financial statements for 2009.

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 June 11, 2009, William Pidruchney filed a Statement of Claim against The City of Edmonton, EPCOR, Power LP General Partner, Power LP and Capital Power. Mr. Pidruchney alleged, among other things, that The City of Edmonton acted beyond its power and contrary to the Municipal Government Act (Alberta) and did not observe an appropriate public process in connection with the sale of the power generation business to Capital Power. Based on its review of the available information, EPCOR believes that the claim is without merit and intends to vigorously defend itself. On June 26, 2009, EPCOR filed a Statement of Defence denying all of the allegations contained in the Statement of Claim. On July 3, 2009, Mr. Justice Hawco of the Alberta Court of Queen's Bench denied an application by William Pidruchney for an interim injunction to delay the closing of the Capital Power initial public offering and its acquisition of EPCOR's power generation business. The court was not satisfied that there was any real merit to Mr. Pidruchney's application. The period of appeal from that decision has expired without an appeal being filed, however, the Statement of Claim continues to be before the courts. The first case management meeting took place on September 15, 2009. An application for Summary Dismissal and Security for Costs is set for November 27, 2009.

On June 30, 2009, an Originating Notice was filed in the Court of the Queen's Bench of Alberta, Judicial District of Edmonton, by the Alberta Federation of Labour, the Canadian Union of Public Employees, Local 30, and the Civic Service Union 52. The Notice names The City of Edmonton, EPCOR Utilities Inc. and Capital Power as Respondents and alleges, among other things, that certain purported actions taken by The City of Edmonton in connection with the sale of the power generation business to Capital Power were outside the jurisdiction of the municipality under the Municipal Government Act. The application was heard on September 11, 2009 and has been dismissed with costs.

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 have received disclosure from the Solicitor General's office regarding the specifics of the allegations, which we are currently reviewing. The next court date is set for December 14, 2009 for the purpose of entering a plea to 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 that have affected the financial statements for the third quarter. As a result of the sale of the power generation business and the Reorganization, the risks associated with that business have transferred to Capital Power effective early July 2009. EPCOR no longer controls the power generation business but it has significant economic exposure to Capital Power and therefore the business risks as described in the annual MD&A for 2008 still apply.

SUBSEQUENT EVENT

On October 7, 2009 the Company acquired potable water and wastewater treatment plant assets from Suncor Energy, under a sale leaseback arrangement for approximately $100 million. The Company will subsequently own and operate these assets for Suncor Energy over a 20 year term. This sale and leaseback arrangement is expected to be a direct financing lease for accounting purposes. Over the 20 year term, the Company has agreed to design, build and finance upgrades to, as well as operate, related assets that will remain under the ownership of Suncor Energy. The Company will be compensated for all services in this agreement through payments over the 20 year term.

OUTLOOK

Earnings in future quarters will continue to benefit from the March 31, 2009 addition of the Gold Bar operation and from the acquisition of potable water and wastewater treatment plant assets from a third party. Due to the onset of cooler weather in Edmonton and the surrounding area, water consumption and revenues will decrease as expected in the fourth quarter of 2009. We will continue to pursue expanding our portfolio of commercial water projects.

Earnings volatility could occur in future quarters as the equity earnings from Capital Power reflect fair value changes in certain power and natural gas derivative contracts that have historically not been hedged for accounting purposes.

We will continue to strongly support government and public approval for the construction of additional transmission capacity in the province and will work closely with our partners and the stakeholders of the Heartland Transmission Project.

We expect EPCOR's financing expenses to settle at current levels as we used the $468 million of cash proceeds from the sale of the generation business to repay bankers' acceptances and commercial paper debt on July 9, 2009. We also received an $896 million interest-bearing long-term receivable from CPLP as part of the consideration for the sale, which effectively has the same terms as a corresponding amount of EPCOR's long-term debt.

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) the final amount of the loss on sale of the power generation business is not expected to differ materially from the amount reported in the third quarter; (ii) the Company plans to 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, and reinvest the proceeds from the share sales in the Company's growing utility infrastructure businesses, including water and wastewater treatment, and power transmission and distribution; (iii) funds from operations will decrease from 2008 due to the absence of the power generation business; (iv) the Company plans to continue using commercial paper and existing credit facilities for its working capital requirements; (v) the principal and interest payments from the Company's long-term loans receivable from CPLP will be sufficient to offset the payment of certain debt obligations of the Company to the City of Edmonton; (vi) capital expenditures are expected to be approximately $183 million over the last quarter of the year which will be financed with existing credit facilities or the issuance of medium-term notes; (vii) the Company's contractual obligations in 2010 will be funded from operating cash flows, partnership distributions from CPLP, interest and principal payments related to the long-term receivable from CPLP, and the Company's credit facilities or medium term notes; (viii) should CPLP be unable to fulfill its obligations to EPCOR in 2010, the Company will rely more heavily on its credit facilities to fund its own obligations in 2010; (ix) the Company's shelf prospectus is expected to be renewed in the fourth quarter of 2009; * expectations regarding the impact on the Company of the capital and credit market instability and expected risk mitigation plans; (xi) the Company will adopt amendments to accounting standards on financial statement disclosure for financial instruments in the fourth quarter of 2009; (xii) earnings for the remainder of 2009 will benefit from the addition of the Gold Bar operation and the acquisition of potable water and wastewater treatment plant assets subsequent to September 30, 2009; and (xiii) water consumption and revenues will decrease in the fourth quarter of 2009.

These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments and other factors it believes are appropriate. The material factors and assumptions underlying this forward-looking information include, but are not limited to: (i) the operation of the Company's facilities; (ii) the assessment of commodity and power markets (iii) the Company's assessment of the markets and regulatory environments in which it operates; (iv) weather; (v) availability and cost of labour and management resources; (vi) performance of contractors and suppliers; (vii) availability and cost of financing; (viii) foreign exchange rates; (ix) management's analysis of applicable tax legislation; * the currently applicable and proposed tax laws will not change and will be implemented; (xi) counterparties will perform their obligations; (xii) expected interest rates, related credit spreads and mortality rates for new notes exchanged for ABCP; (xiii) ability to implement strategic initiatives which will yield the expected benefits; (xiv) the Company's assessment of capital markets and ability to complete future share offerings; and (xv) factors and assumptions in addition to the above related to the Company's 72.2% equity interest in CPLP including, but not limited to: power plant availability, including those subject to acquired PPAs, the assessment of commodity and power markets, and proposed environmental regulations will be implemented.

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) unanticipated maintenance and other expenditures; (iii) availability and price of energy commodities; (iv) electricity load settlement; (v) regulatory and government decisions including changes to environmental, financial reporting and tax legislation; (vi) weather and economic conditions; (vii) competitive pressures; (viii) construction; (ix) availability and cost of financing; * foreign exchange; (xi) availability of labour and management resources; (xii) performance of counterparties, partners, contractors and suppliers in fulfilling their obligations to the Company; and (xiii) risks in addition to the above related to the Company's 72.2% equity interest in CPLP including, but not limited to; power plant availability and performance.

This MD&A includes the following updates to previously issued forward-looking statements: (i) net income will likely not increase from 2008 as was disclosed in the 2008 annual MD&A, primarily due to the Reorganization; (ii) expected capital spending will decrease from the previously disclosed $591 million to approximately $556 million due to project delays on various Distribution and Transmission and Water Services projects; (iii) earnings in the third quarter of 2009, before fair value changes were not consistent with earnings in the first quarter primarily due to the loss on sale of the power generation business; (iv) capital spending for the last half of 2009 will decrease to approximately $245 million from the $280 million previously disclosed due to project delays on various Distribution and Transmission and Water Services projects; (v) the Company has cancelled its $200 million bilateral credit facility after the facility was extended into July 2009 and not renewed the facility as disclosed in the interim MD&A for the first quarter of 2009; and (vi) the Company expects that financing requirements for capital projects will decrease as a result of the Reorganization and not be consistent with prior periods as disclosed in prior period annual and interim MD&A.

As a result of the Reorganization, EPCOR no longer controls the power generation business that was sold to Capital Power. Accordingly, readers should refer to the public disclosures of Capital Power for any revisions to prior forward looking statements relating to EPCOR's former power generation business.

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

    -------------------------------------------------------------------------
                                                                  Net income
    Quarter ended                                       Revenues       (loss)
    -------------------------------------------------------------------------
                                                      (Unaudited, $ millions)

    September 30, 2009                                $      350  $      (56)
    June 30, 2009                                            740          50
    March 31, 2009                                           890         104
    December 31, 2008                                        800          15
    September 30, 2008                                       954          76
    June 30, 2008                                            865          16
    March 31, 2008                                           799          68
    December 31, 2007                                        962          59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Events for 2009, 2008 and 2007 quarters that have significantly impacted
net income and the comparability between quarters are:

    -   June 30, 2009 second quarter results included unrealized fair value
        gains resulting from the impact of low Alberta power prices on our
        derivative electricity contracts that were not designated as hedges
        for accounting purposes, unrealized fair value gains on Power LP's
        forward foreign exchange contracts used to economically hedge U.S.
        cash flows and positive operating income as a result of the transfer
        of Gold Bar on March 31, 2009.

    -   March 31, 2009 first quarter results included a $26 million gain on
        the sale of a 10% interest in the Battle River PSA, and unrealized
        fair value gains resulting from the impact of low Alberta power
        prices on our derivative electricity contracts that were not
        designated as hedges for accounting purposes. These gains were partly
        offset by unrealized fair value losses on Power LP's natural gas
        supply contracts, and forward foreign exchange contracts used to
        economically hedge U.S. cash flows.

    -   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
        derivative 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 derivative
        electricity 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 derivative 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.
    

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 Relations: Tim le Riche, (780) 969-8238, tleriche@epcor.ca; Corporate Relations: Claudio Pucci, (780) 969-8245 or toll free (877) 969-8280, cpucci@epcor.ca

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EPCOR Utilities Inc.

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