Case Study

EPCOR tackles hard choices with ambitious board

The Globe and Mail

EPCOR CEO Don Lowry (DAN RIEDLHUBER)

This article is the second in a series that profiles boards that stand out for their drive to constantly raise their game. The authors, who are partners at Guided Futures, have interviewed over 75 directors, chairs and CEOs on how boards must evolve to make a real difference to their company’s future success. Read part one Taking on global leadership at Methanex , part three Raising the bar at CN Rail and part four Related contentCorporate Governance: From golden rules to golden principles.

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When a company stretches far beyond its origins, what kind of board makes that possible? Consider EPCOR Utilities Inc., initially established as Edmonton’s local utility, which grew into an admired regional provider of water and electrical services. That diversification resulted from growth across Alberta, B.C., and now, the American southwest; a move into commercial water services, especially for the oil sands; and until recently, a major expansion in power generation.

Management believes that the company could not have come this far without its directors stepping up as well. Over the past two years, company success has brought hard choices to this board. After intensive debate, they have agreed to endorse an entire re-shaping of EPCOR’s intended future.

Fortunately, this is not just any municipal board. In an unusual shareholders' agreement in the mid-1990s, the city opted not to nominate its councillors, enabling EPCOR to enlist a fully independent group of professional directors. The board governs at arm’s length, acting like a true public issuer.

Today’s membership has emerged after years of careful selection. Six directors from Edmonton bring a special passion for strengthening the city’s crown jewel. Others from across the country reflect the company’s broader reach. Several are current or former CEOs. Deep financial and operating skills combine with essential insight into the environment, health and safety, talent management, and government relations. A diverse mix of personalities includes wise advisors, lateral thinkers and contrarians.

According to several directors, this board ranks among the best – collegial, focused, frank, and accountable. Fine words, but they back them up with three stories that help explain how the board’s maturity came about. Three key events have enabled this board to make substantial contributions, while also raising its game.

In the mid-2000s, the company prepared to build North America’s first super-critical coal plant – a huge bet, given EPCOR’s size. For greater comfort, a special board committee watched over the design, financing and execution. Initially, management was concerned at this unusual involvement, but then was won over. Don Lowry, CEO, explains: “It wasn’t another level of bureaucracy or a ‘gotcha’ committee. It was really ‘how can we help management not miss any opportunities or risks?’

Structured advice around big initiatives became standard practice, helping EPCOR reach its next big decision. Management worried that the growing importance of power generation was unsustainable. Huge capital intensity and power prices that could fluctuate wildly meant that power generation was outgrowing a municipal shareholder’s natural risk appetite.

The board reflected: Should EPCOR spin off the generation business (Capital Power) to concentrate on water and electrical distribution, with predictable rates of return? That was no easy choice. A senior director relates: “The decision put us to the test – very controversial at the beginning.” By one account: “Many directors were with us when we were small; it was hard to sell when they’d helped build it.”

The spin-off produced a major infusion of new capital, leading to a third major decision: how to re-invest? Management asked the board for "a hunting license," to pursue lower risk water-management acquisitions in the U.S. southwest. Directors tightened the selection criteria and subjected acquisition candidates to searching scrutiny. One director reported: “We (took) time to understand the markets and risks, as well as water rights, the regulatory process, and doing business in the U.S.”

That diligence was soon put to good use. The purchase of Chaparral City (Arizona) Water Company was completed in June. Subject to approvals, EPCOR has also agreed to acquire the Arizona and New Mexico businesses of American Water Company. This will make EPCOR the largest private water supplier in those two states. The license continues to guide the search for new targets and to focus board decision-making.

Meanwhile, another consistent discipline now integrates the best thinking of board and management. All major investment decisions come to the board for one, two or three "bounces." Lowry says: “We never surprise them. They know we bring the big projects for review of concept, then financing, and then approval.”

With each review, management listens for the board’s perceptions of likely returns, the timing of revenue streams, shareholder concerns, and the implications for EPCOR’s risk appetite. Some concepts never earn a second bounce.

This board also works hard to maintain trust and open communications with the city. One director noted: “We are extraordinarily fortunate to have a shareholder who really supports our organization and our role.”

The prime factor making this board effective, however, is the partnership between board and management, and especially between the chair, Hugh Bolton, and Don Lowry.

Directors describe it this way:

“Management really values independent thinking – constructive criticism that helps better them as a company.”

“One of the great hallmarks of EPCOR is the board’s relationship with the CEO, one of the best I have ever seen. Give Hugh Bolton high credit. He is a very strong chair, a very strong mentor to Don and to the board.”

With a record like this, some boards might rest content. For this board, however, the issues they plan to tackle next are, frankly, ambitious. The turbulent global economy, how to thrive amid greater regulation, EPCOR’s need for new capital market strategies, and the board’s drive for better self-evaluation are just the start of their challenging agenda.

While they have come a long way, this company and its board have a large future to shape and significant growing left to do.

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