Epcor spinning off power generation business

Globe and Mail: SHAWN MCCARTHY - May 8, 2009

OTTAWA — Edmonton's municipally owned Epcor Utilities Inc. is spinning off its power generation business into a publicly trade company, in what promises to be the largest initial public offering in the Canadian marketplace since 2007.

The new company, Capital Power Corp., will own 31 coal- and natural-gas-fired power plants with a capacity of 3,300 megawatts in North America and plans to expand that portfolio through North American acquisitions.

The remaining Epcor Utilities will retain the company's power transmission and distribution operations, and its water and wastewater services.

The creation of a standalone, publicly traded power generation business will give the company access to equity markets to finance acquisitions and new construction, including the commercialization of risky, capital-intensive “clean coal” facilities necessary to meet greenhouse gas emission standards.

Epcor will initially sell a 25-per-cent equity stake in Capital Power to the public, but says it may eventually sell “all or a substantial portion of” its ownership stake and invest the proceeds in the city-owned utility infrastructure business.

“There has been tremendous growth in Epcor over the last 10 years, and the separation of these businesses and different approaches to access to capital enable both businesses to continue to grow,” said Brian Vaasjo, Epcor executive vice-president. He will assume the job of chief executive officer of Capital Power.

The Epcor prospectus with details of the deal is to be released next week. Estimates are that its power generation assets could have a market value of $2-billion, meaning a $500-million IPO of a 25-per-cent stake.

The sale, to be completed this summer, will be led by TD Securities Inc. and Goldman Sachs Canada Inc. It represents a major milestone for Canadian markets, which have been virtually shut down to companies considering an IPO for at least the last year.

Pending the release of the prospectus, Mr. Vaasjo said he could not comment on whether the new company will have share ownership restrictions that would prevent a takeover, either domestic or foreign.

Capital Power will join Calgary-based TransAlta Corp. as an Alberta-based publicly traded power utility with large holdings in coal-fired plants.

North American utilities face an uncertain future with regard to coal-fired generation as Canadian and U.S. governments implement new targets to reduce greenhouse gas emissions.

Investors are wary. Last year, several Wall Street firms adopted a set of “carbon principles” that required utilities seeking financing for new coal plants to adopt aggressive emission reduction technologies. Many institutional investors are also demanding that energy companies spell out what financial risks they face from looming climate change regulations.

Federal Environment Minister Jim Prentice recently promised new regulations that would essentially prohibit the building of new coal-fired power plants unless they include expensive and untried technology to capture carbon dioxide emissions and inject them underground for permanent storage.

However, the proposed federal rules would not force companies to shut existing plants, as Ontario plans to do with its coal-fired facilities.

Epcor prides itself on being a leader in clean-coal technology. It has a proposal to build a demonstration power plant in central Alberta that would include carbon capture and storage technology, and is developing “amine scrubbing” technology that can remove CO{-2} from emissions at existing plants.

Mr. Vaasjo said he doesn't expect pending climate change rules to dampen investor enthusiasm. “Beauty is in the eye of the beholder,” he said.

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