EDMONTON, Alberta – Capital Power Corporation (Capital Power, or the Company) (TSX: CPX) today released financial results for the second quarter ended June 30, 2017.
Net income attributable to shareholders in the second quarter of 2017 was $109 million and basic earnings per share attributable to common shareholders was $1.03 per share, compared with $23 million, or $0.19 per share, in the comparable period of 2016. Normalized earnings attributable to common shareholders in the second quarter of 2017, after adjusting for non-recurring items and fair value adjustments, were $26 million or $0.27 per share compared with $29 million or $0.30 per share in the second quarter of 2016.
Net cash flows from operating activities were $78 million in the second quarter of 2017 compared with $70 million in the second quarter of 2016. Adjusted funds from operations were $47 million in the second quarter of 2017, compared to $79 million in the second quarter of 2016.
For the six months ended June 30, 2017, net income attributable to shareholders was $159 million and basic earnings per share attributable to common shareholders was $1.47 per share compared with $17 million and $0.07 for the six months ended June 30, 2016. For the six months ended June 30, 2017, normalized earnings attributable to common shareholders were $59 million, or $0.61 per share, compared with $61 million, or $0.63 per share, in the first six months of 2016.
Net cash flows from operating activities were $177 million for the six months ended June 30, 2017 compared with $201 million for the six months ended June 30, 2016. Adjusted funds from operations were $138 million for the first six months of 2017, compared to $172 million in the comparable six month period last year.
"Capital Power's financial results for the second quarter of 2017 were in line with management's expectations," said Brian Vaasjo, President and CEO of Capital Power. "Second quarter results benefitted from strong operating performance with average facility availability of 94% and a solid contribution from our portfolio optimization activities. Our trading desk captured an average realized Alberta power price of $52 per megawatt hour (MWh) in the second quarter, well above the average spot price of $19 per MWh."
"In the second quarter, the Company continued to execute on its growth strategy by adding nearly 1,300 megawatts of contracted generation through the acquisitions of Veresen Inc.'s thermal power business and the Decatur Energy Center, in addition to the start of commercial operations for our Bloom Wind project. Construction costs for Bloom Wind were under budget and the project was completed one month ahead of schedule. The addition of these six facilities has materially increased the Company's contracted cash flows and has further diversified the generation fleet throughout North America," stated Mr. Vaasjo.
"Based on Capital Power's outlook and consistent with our 7% annual dividend growth guidance for 2017, I am pleased to announce that the Board of Directors has approved a 7.1% or $0.11 per common share dividend increase that increases the annualized dividend to $1.67 per share effective for the third quarter 2017 quarterly dividend payment," continued Mr. Vaasjo. "With the recent additions to our fleet that have strengthened our contracted cash flow profile, we are extending our current 7% annual dividend growth guidance for 2018 by an additional two years to the end of 2020. Each annual increase is subject to changing circumstances and approval by the Board of Directors of Capital Power at the time of the increase."
Operational and Financial Highlights 1 (unaudited)
Six months endedJune 30
On July 5, 2017, Capital Power and Siksika Resource Developments Limited (SRDL) entered into an exclusive agreement to jointly develop power projects on the Siksika Nation reserve. The Siksika Nation is located approximately 100 kilometers southeast of Calgary. The Siksika Nation controls one of the largest reserves in Canada comprising 172,000 acres of land with excellent solar, wind and gas projects potential. The location is attractive for the development of power projects given the existing transmission and distribution infrastructure, and ample water.
Capital Power and SRDL expect to develop multiple power projects including both renewable and natural gas-fired technologies. The agreement contemplates Capital Power as the lead developer and operator with both SRDL and Capital Power taking joint ownership positions in projects. The purpose is also to foster economic development and provide socioeconomic benefits to the Siksika Nation and its members such as employment, business opportunities for Siksika Nation owned companies, education, training and support for traditional language and cultural enrichment.
SRDL is a wholly-owned company of the Siksika Nation. It currently operates several enterprises on the Siksika Nation reserve. The Siksika Nation has approximately 6,000 members.
On April 12, 2017, the Company announced that it entered into an agreement to acquire all of the ownership interests in Decatur Power Holdings, LLC, which owns the Decatur Energy Center (Decatur Energy) from an affiliate of LS Power Equity Partners III for $603 million (US$448 million), including working capital and other closing adjustments of $9 million (US$7 million). Decatur Energy is a 795 MW natural gas-fired combined cycle power generation facility located in Decatur, Alabama that operates under a tolling agreement.
Decatur Energy sells capacity and energy to a regional entity under a long-term contract which has an original term of 10 years and expires December 31, 2022. Decatur Energy is well-positioned, given anticipated market conditions, as well as significant remaining useful life, to be re-contracted or to pursue other commercial alternatives at the end of the current long-term contract, including the ability to sell power into the Pennsylvania, New Jersey, and Maryland interconnection market starting in 2023.
Financing of the Decatur Energy acquisition consisted of a combination of debt and equity. On April 24, 2017, the Company announced the completion of its previously announced public offering of 7,375,000 subscription receipts (Subscription Receipts), on a bought deal basis, at an issue price of $24.75 per Subscription Receipt, for total gross proceeds of $183 million less issue costs of $7 million. On June 13, 2017, upon closing of the Decatur Energy acquisition, each Subscription Receipt was converted for one common share of the Company. No dividend record date occurred during the period when the Subscription Receipts were outstanding and as such, no obligations to make any cash dividend equivalent payments were triggered.
The balance of the purchase price was financed through debt utilizing a temporary expansion of Capital Power’s credit facilities and is expected to be followed by permanent financing with an issuance of long-term debt later in 2017.
The Decatur Energy acquisition supports the Company’s growth strategy and increases the Company’s geographical diversification and contracted cash flows. During the first full year of operations, the Decatur Energy acquisition is expected to increase adjusted funds from operations by $43 million and increase adjusted EBITDA by $60 million.
On June 1, 2017, the Company’s 178MW Bloom Wind facility commenced commercial operations. On June 12, 2017, the Company received $244 million (US $181 million) in financing from an affiliate of Goldman Sachs in exchange for Class A interests of a subsidiary of the Company. The Company incurred issue costs of $7 million (US$5 million) associated with the financing. Effective July 1, 2017, Bloom Wind will operate under a 10-year proxy revenue swap agreement with Allianz Risk Transfer, a subsidiary of Allianz SE. Under the contract, which was executed on April 21, 2016, Capital Power swaps the market revenue of the project’s generation for a fixed annual payment for a 10-year term. The agreement secures long-term predictable revenues and mitigates generation volume uncertainty.
On February 21, 2017, the Company announced that it entered into an agreement to acquire the thermal power business of Veresen Inc. Under the terms of the agreement, Capital Power acquired 284 MW of generation from two natural gas-fired power assets in Ontario consisting of the 84 MW East Windsor Cogeneration Centre (East Windsor) and a 50% interest in the 400 MW York Energy Centre (York Energy), and operates both facilities. The transaction also includes 10 MW of zero-emissions waste heat generation from two facilities (5 MW each), together known as EnPower Green Energy Generation (EnPower), located at Westcoast Energy’s BC Gas Pipeline compressor stations in Savona and 150 Mile House, British Columbia.
On April 13, 2017, the Company announced that it had completed the acquisition of the two natural gas-fired power facilities in Ontario. The purchase price for the natural gas-fired facilities consisted of (i) $235 million in total cash consideration, including working capital and other closing adjustments of $11 million, and (ii) the assumption of $253 million of project level debt (proportionate basis at acquisition date net book value).
On June 1, 2017, the Company completed the acquisition of EnPower. The purchase price consisted of (i) $8 million of total cash consideration, including working capital and other closing adjustments of $3 million, and (ii) the assumption of $18 million of project level debt.
The acquisitions of these facilities support the Company’s growth strategy and are consistent with the Company’s technology and operating focus. During the first full year of operations, these acquisitions are expected to increase adjusted funds from operations by $24 million and increase adjusted EBITDA by $55 million.
Effective April 3, 2017, Keith Trent and Katharine Stevenson were appointed to the Capital Power Board of Directors.Amendment of Genesee Coal Mine Joint Venture Agreement
On March 28, 2017, the Company announced that it entered into an agreement (the Amending Agreement) to amend its Genesee Mine Joint Venture Agreement with Prairie Mines & Royalty ULC (PMRU), a subsidiary of Westmoreland Coal Company, to accelerate the repayment of amounts it would otherwise have owed to PMRU during the term of the agreement and eliminate all future payments to PMRU relating to existing capital assets at the Genesee Coal Mine (Coal Mine). Capital Power will continue to pay PMRU contracted mining fees for PMRU’s ongoing operation of the Coal Mine.
By accelerating the $70 million repayment of capital expenditures to PMRU, the transaction will reduce Capital Power’s cost of coal for the Genesee facility, and enhance the Company’s net income, adjusted EBITDA, net cash flows from operating activities and adjusted funds from operations. These cost reductions were anticipated to take place and have been included in the adjusted funds from operations guidance that was provided as part of the Company’s year-end disclosure on February 17, 2017. As a result of the transaction, net cash flows from operating activities are expected to increase by $14 million for 2017. The operations and management of the Coal Mine are unchanged as a result of the Amending Agreement and the Company will continue to control the Coal Mine and treat it as a subsidiary.
Coal for the Genesee facility is supplied by the adjacent Coal Mine under a long-term, cost of service supply agreement. Prior to the Amending Agreement, Capital Power paid PMRU a fee to cover PMRU’s depreciation expense and certain other costs, as well as provide a variable rate of return to PMRU. These fees paid to PMRU were included as part of Capital Power’s cost of coal for operating the Genesee facility, and will be eliminated with the Amending Agreement.
The cost savings for Capital Power will be magnified through 2030 with the phase-out of coal-fired generation under the Alberta Climate Leadership Plan, which would accelerate the amounts in respect of depreciation that would have been paid to PMRU due to the shortened asset lives.
On July 25, 2017, the Company’s Board of Directors approved an increase of 7.1% in the annual dividend for holders of its common shares, from $1.56 per common share to $1.67 per common share. This increased common dividend will commence with the third quarter 2017 quarterly dividend payment on October 31, 2017 to shareholders of record at the close of business on September 29, 2017.
Capital Power will be hosting a conference call and live webcast with analysts on July 26, 2017 at 9:00 am (MT) to discuss its second quarter operating and financial results. The conference call dial-in numbers are:
(604) 638-5340 (Vancouver)(403) 351-0324 (Calgary)(416) 915-3239 (Toronto)(514) 375-0364 (Montreal)(800) 319-4610 (toll-free from Canada and USA)
Interested parties may also access the live webcast on the Company’s website at www.capitalpower.com with an archive of the webcast available following the conclusion of the analyst conference call.
Click here to view the management's discussion and analysis and consolidated financial statements.