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Q3 2008 EPCOR Power L.P. Earnings Conference Call - Final.

Article Excerpt
OPERATOR: Welcome to the EPCOR Power LP third quarter 2008 review conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) I would like to remind everyone that this conference call is being recorded on Tuesday, October 28, 2008, at one o'clock Eastern time.

I want now turn the conference over to Randy Mah, Senior Manager Investor Relations. Please go ahead, sir.

RANDY MAH, SENIOR MANAGER, IR, EPCPOR POWER LP: Good morning and thank you for joining us today. This morning EPCOR Power LP released its third quarter 2008 results. The news release on the third-quarter results and the presentation slides for this conference call are posted on the partnership's website at EPCORPowerLP.ca. This conference call is also being webcast from our website. You can access the webcast presentation by clicking on the webcast link from the homepage.

Joining me on the conference call is Brian Vaasjo, President, and Stuart Lee, Chief Financial Officer. Brian will discuss the highlights for the third quarter and provide a status update on the 2008 corporate priorities. Stuart will provide a financial summary of the third quarter and update the partnership's outlook. Following our prepared remarks we will open up the lines for your questions.

Before we begin, let me direct your attention to the cautionary statement regarding forward-looking information on slide number two. Certain information in this presentation and in oral answers to questions contains forward-looking information. Actual results could differ materially from conclusions, forecasts, or projections in the forward-looking information and certain material factors or assumptions that were applied in drawing conclusions or making forecasts or projections as reflected in the forward-looking information.

Additional information about the material factors and risks that could cause actual results to differ materially from the conclusions, forecasts, or projections in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information is contained on pages 19 to 20 of this presentation and on pages 24 to 26 of the partnership's Q3 2008 management's discussion and analysis filed on SEDAR. With that out of the way, I will turn the call over to Brian.

BRIAN VAASJO, EVP & COO, EPCOR POWER LP: Thanks, Randy, and good afternoon. I will begin my comments by starting on slide three with the highlights for the third quarter. The partnership's financial performance in the third quarter was generally in line with our expectations. Specifically, cash provided by operating activities before working capital changes was $41 million compared to $34.7 million in the third quarter of 2007. Stuart will provide more details on the financial performance in his remarks.

During the quarter we have continued to execute on our strategic objectives announcing the acquisition of the Morris Cogeneration facility and the commencement of a sales process for our interest in Primary Energy Recycling Holdings. Pending successful completion of these transactions we believe the Morris acquisition will strengthen our portfolio of high-quality, contracted power assets and the sale of PERH will allow deployment of cash to other potential investments.

I will provide more details on these transactions later in the presentation. I will now turn the call over to Stuart to discuss the financial highlights.

STUART LEE, CFO, EPCOR POWER LP: Thanks, Brian. Starting on slide four, the partnership generated revenues excluding fair value changes of approximately CAD153 million, a 10% increase from the same period a year ago. Operating margin before fair value changes was approximately CAD56 million in the third quarter. This was down 4.3% compared to the same period a year ago primarily due to lower operating margins at the Northwest US plants due to a milestone payment for the Fredrickson facility under its long-term service agreement with the turbine manufacturer.

In the third quarter cash from operations was down 4.2%, due to similar factors outlined for operating margin. Capital expenditures were CAD6.4 million in the third quarter. On a year-to-date basis maintenance CapEx was approximately CAD18 million. Our forecast for 2008 annual maintenance CapEx has not changed and is expected to be in the range of CAD23 million to CAD25 million for the year.

The next two slides, slides five and six, show continuity from the third quarter of 2007 to the third quarter of 2008 for cash provided by operating activities in net income. On slide at five, cash provided by operating activities was CAD21.5 million for the third quarter of 2008 compared to CAD26.5 million for the same period in 2007.

The CAD5 million decrease in cash provided by operating activities was mainly due to the CAD11.3 million change in working capital and the CAD7.1 million lower operating margins in the Northwest US plants primarily due to the Fredrickson milestone payment I mentioned previously. The decreases in cash provided by operating activities was partially offset by net realized losses on foreign exchange and interest rate contracts of CAD8.1 million in 2007.

Moving to slide six, this slide shows the third quarter continuity of net income. Partnership reported a net loss of CAD153 million for the third quarter of 2008 compared to a CAD15.9 million net loss for the same period last year. The CAD137 million increase in net loss was primarily due to fair value changes of CAD130 million on various contracts. The majority of the changes in fair value are the result of larger decrease in the future market prices for natural gas in the third quarter of 2008 compared to the third quarter of 2007.

Foreign exchange losses of CAD15.8 million in the third quarter of 2008 compared to a gain of CAD24.1 million for the same period in 2007 also contributed to the higher net loss. The increase in net loss is partially offset by a CAD22.7 million decrease in net income tax expense relating to future income taxes that have been recorded for the 2011 [city] tax.

On slide seven, this slide shows the year-over-year change for net enhancement margins and waste heat costs at our Ontario plants for the third quarter and year-to-date. As you are aware, when natural gas prices are high the Partnership can elect to sell natural gas in the market as opposed to using the natural gas to produce power.

Our natural gas prices in 2008 compared to 2007 has allowed for greater enhancement opportunities. As a result, higher enhancement opportunities help to mitigate the waste heat availability impact from our Ontario operations. For example, as shown in the graph for the third quarter the higher increase in the change in net enhancement margins exceeded the change in waste heat costs on a year-over-year basis. The first nine months of 2008 the CAD3 million increase in net enhancement margins partially off-set the CAD4.4 million higher waste heat costs.

Turning to slide eight, with the current market turmoil impacting global capital markets and negligibly impacting our unit price, this slide briefly outlines the how the Partnership is relatively well positioned. The Partnership has good liquidity position with CAD300 million of available lines and has no significant near-term debt maturities. In terms of counterparty credit risk, all of the foreign-exchange...

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