EDMONTON, Alberta – Capital Power Corporation (Capital Power, or the Company) (TSX: CPX) today released financial results for the third quarter ended September 30, 2017.
Net loss attributable to shareholders in the third quarter of 2017 was $5 million and basic loss per share attributable to common shareholders was $0.13 per share, compared with net income of $66 million, and earnings per share of $0.63 per share, in the comparable period of 2016. Normalized earnings attributable to common shareholders in the third quarter of 2017, after adjusting for non-recurring items and fair value adjustments, were $29 million or $0.28 per share compared with $30 million or $0.31 per share in the third quarter of 2016.
Net cash flows from operating activities were $120 million in the third quarter of 2017 compared with $105 million in the third quarter of 2016. Adjusted funds from operations were $134 million in the third quarter of 2017, compared to $79 million in the third quarter of 2016.
For the nine months ended September 30, 2017, net income attributable to shareholders was $154 million and basic earnings per share attributable to common shareholders was $1.30 per share compared with $83 million and $0.71 per share for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, normalized earnings attributable to common shareholders were $88 million, or $0.88 per share, compared with $91 million, or $0.95 per share, in the first nine months of 2016.
Net cash flows from operating activities were $297 million for the nine months ended September 30, 2017 compared with $306 million for the nine months ended September 30, 2016. Adjusted funds from operations were $272 million for the first nine months of 2017, compared to $251 million in the comparable nine month period last year.
"Capital Power's financial results for the third quarter of 2017 were in line with management's expectations," said Brian Vaasjo, President and CEO of Capital Power. "Our results benefitted from strong operating performance, with average plant availability of 97 per cent in addition to contributions from assets acquired earlier in the year and the addition of Bloom Wind. Despite low Alberta spot power prices that averaged $25 per megawatt hour (MWh), our trading desk continued to perform well and captured an average realized power price of $49 per MWh."
"The net loss in the third quarter of 2017 was driven by non-cash impairment charges of $83 million, which were more than offset on a year-to-date basis by the recognition of deferred tax recoveries of $86 million, in the second quarter of 2016, associated with the Company's U.S. income tax loss carryforwards."
"In the third quarter, the Company continued its organic growth in the U.S. renewables market with the commencement of our second wind development project," said Mr. Vaasjo. "The development of the New Frontier Wind project is underway after we finalized a 12-year fixed price agreement in August 2017 with Morgan Stanley for 87 per cent of the facility's output. New Frontier Wind is a 99 megawatt wind project located in North Dakota with commercial operations expected to commence in December 2018 that will strengthen our contracted cash flow profile."
"We also completed two recent financings totaling $600 million in gross proceeds, which included a $450 million medium-term note and $150 million in preferred shares. We remain committed to maintaining our investment grade credit ratings while strengthening our financing capabilities to fund growth with these financings," continued Mr. Vaasjo.
"The Company generated adjusted funds from operations of $134 million in the third quarter and $272 million in the first nine months of 2017. Based on our outlook for the fourth quarter of the year, we are on track to be near the mid-point of the $340 to $385 million target range for 2017," stated Mr. Vaasjo.
Operational and Financial Highlights
1 The operational and financial highlights in this press release should be read in conjunction with Management's Discussion and Analysis and the unaudited condensed interim consolidated financial statements for the nine months ended September 30, 2017.2 Earnings before net finance expense, income tax expense, depreciation and amortization, impairments, foreign exchange gains or losses, finance expense from its joint venture interests, and gains or losses on disposals (adjusted EBITDA), normalized earnings attributable to common shareholders, normalized earnings per share and adjusted funds from operations are non-GAAP financial measures and do not have standardized meanings under GAAP and are, therefore, unlikely to be comparable to similar measures used by other enterprises. See Non-GAAP Financial Measures.3 Commencing with the Company's March 31, 2017 quarter-end, the Company uses adjusted funds from operations as a measure of the Company's ability to generate cash from its current operating activities to fund growth capital expenditures, debt repayments and common share dividends to the Company's shareholders.
During the three months ended September 30, 2017, the Company recognized pre-tax impairment charges of $32 million, $14 million and $37 million with respect to its Southport, Roxboro and Decatur Energy facilities. The impairment charges had no cash impact.
The impairments related to the Southport and Roxboro facilities were based on the uncertainty created by potential additional capital investment at these facilities to meet more restrictive emissions standards. These emissions standards are likely to render the Southport and Roxboro facilities uneconomic once the power purchase agreements associated with those facilities expire in 2021. The impairment related to the Southport facility removed the carrying amount of the related goodwill of $21 million and reduced the carrying amount of property, plant and equipment by $11 million. The impairment related to the Roxboro facility reduced the carrying amount of the related property, plant and equipment.
An income tax recovery of $86 million was recorded in the second quarter of 2017 related to the recognition of a deferred tax asset associated with the expected utilization of tax loss carryforwards, which was primarily realizable as a result of the acquisition of Decatur Energy. The goodwill impairment related to the Decatur Energy facility partially offsets this income tax recovery, as the goodwill associated with the Decatur Energy facility was primarily attributable to the ability to use these tax losses.
On September 18, 2017, the Company issued $450 million of unsecured medium-term notes due in 2024 with interest payable semi-annually at 4.284% commencing on March 18, 2018. The net proceeds of the offering were used for repayment of amounts owing under the Company's credit facilities and for general corporate purposes.
On August 30, 2017, Capital Power announced that the development of its New Frontier Wind facility will proceed immediately. New Frontier Wind is a 99 MW facility to be constructed in McHenry County, North Dakota and is anticipated to cost $182 million (US$145 million). The Company is in the final stages of selecting a turbine supplier and commercial operation of the facility is expected in December of 2018. Capital Power will operate New Frontier Wind under a 12-year fixed price contract with Morgan Stanley Capital Group Inc. covering 87% of the facility's output. Under the contract, Capital Power will swap the market revenue of the facility's generation for a fixed price payment over a 12-year term. The agreement will secure long-term predictable revenues, allowing New Frontier Wind to secure renewable energy tax equity financing and provide Capital Power the opportunity to complete its second wind development project in the growing U.S. renewables market.
On August 9, 2017, the Company issued 6 million Cumulative Minimum Rate Reset Preference Shares, Series 9 (Series 9 Shares) priced at $25.00 per share for gross proceeds of $150 million less issue costs of $4 million on a bought deal basis with a syndicate of underwriters. The preferred shares will pay fixed cumulative dividends of $1.4375 per share per annum, yielding 5.75% per annum, payable on the last business day of March, June, September and December of each year, as and when declared by the Board of Directors of Capital Power, for the initial period ending September 30, 2022. The dividend rate will be reset on September 30, 2022 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 4.12%, provided that in any event such rate shall not be less than 5.75%. The Series 7 Shares are redeemable by Capital Power, at its option, on September 30, 2022 and every five years thereafter at a value of $25.00 per share.
Holders of the Series 9 Shares will have the right to convert all or any part of their shares into Cumulative Floating Rate Preference Shares, Series 10 (Series 10 Shares), subject to certain conditions, on September 30, 2022 and every five years thereafter. Holders of the Series 10 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus 4.12%, as and when declared by the Board of Directors of Capital Power. The Series 10 Shares would be redeemable by Capital Power, at its option, on September 30, 2027 and September 30 of every fifth year thereafter at a value of $25.00 per share. The Series 10 shares would also be redeemable by Capital Power, at its option, on any date after September 30, 2022, excluding September 30 of every fifth year, at a value of $25.50 per share.
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.
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. On June 13, 2017, the Company completed the acquisition of Decatur Energy 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 which was followed by permanent financing with the issuance of the medium-term note disclosed above.
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 $12 million, and (ii) the assumption of $254 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.
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.
Capital Power will be hosting a conference call and live webcast with analysts on October 25, 2017 at 9:00 am (MT) to discuss its third 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.
The Company uses (i) adjusted EBITDA, (ii) adjusted funds from operations, (iii) normalized earnings attributable to common shareholders, and (iv) normalized earnings per share as financial performance measures. These terms are not defined financial measures according to GAAP and do not have standardized meanings prescribed by GAAP, and, therefore, are unlikely to be comparable to similar measures used by other enterprises. These measures should not be considered alternatives to net income, net income attributable to shareholders of the Company, net cash flows from operating activities or other measures of financial performance calculated in accordance with GAAP. Rather, these measures are provided to complement GAAP measures in the analysis of the Company's results of operations from management's perspective. Reconciliations of adjusted EBITDA to net income (loss), adjusted funds from operations to net cash flows from operating activities and normalized earnings attributable to common shareholders to net income (loss) attributable to shareholders of the Company are disclosed below and are discussed further in the Company's Management's Discussion and Analysis, prepared as of October 24, 2017, for the nine months ended September 30, 2017 which is available under the Company's profile on SEDAR at
Capital Power uses adjusted EBITDA to measure the operating performance of facilities and categories of facilities from period to period. Management believes that a measure of facility operating performance is more meaningful if results not related to facility operations such as impairments, foreign exchange gains or losses and gains or losses on disposals are excluded from the adjusted EBITDA measure.
A reconciliation of adjusted EBITDA to net income is as follows:
1 Total income from joint ventures as per the Company's consolidated statements of income.
Adjusted funds from operations represents net cash flows from operating activities adjusted to include net finance expenses and current income tax expenses and exclude changes in operating working capital and distributions received from the Company's joint venture interests. Net finance expenses and current income tax expenses are included as the timing of cash receipts and payments of interest and income taxes and the resulting cash basis amounts are not comparable from period to period. Changes in operating working capital are excluded from adjusted funds from operations as the timing of cash receipts and payments also affects the period-to-period comparability. Distributions received from the Company's joint venture interests are excluded as the distribution is calculated after the effect of joint venture debt payments, which are not considered an operating activity. Adjusted funds from operations also exclude the impact of fair value changes in certain unsettled derivative financial instruments that are charged or credited to the Company's bank margin account held with a specific exchange counterparty. The Company includes interest and current income tax expenses excluding Part VI.1 tax recorded during the period rather than interest and income taxes paid. Adjusted funds from operations is reduced by sustaining capital expenditures and preferred share dividends and adjusted to include the Company's share of the adjusted funds from operations of its joint venture interests and cash from coal compensation that will be received annually.
A reconciliation of net cash flows from operating activities to adjusted funds from operations is as follows:
Included in other cash items on the condensed interim consolidated statements of cash flows.2 Excludes unrealized changes on interest rate derivative contracts and amortization and accretion charges.3 Includes Genesee performance standard expenditures and sustaining capital expenditures net of joint venture contributions of $3 million and $7 million for the three and nine months ended September 30, 2017, respectively, compared with $2 million and $5 million for the three and nine months ended September 30, 2016, respectively.
The Company uses normalized earnings attributable to common shareholders and normalized earnings per share to measure performance by period on a comparable basis. Normalized earnings per share is based on (loss) earnings used in the calculation of basic (loss) earnings per share according to GAAP and adjusted for items that are not reflective of performance in the period such as unrealized fair value changes, impairment charges, unusual tax adjustments, gains and losses on disposal of assets or unusual contracts, and foreign exchange gain or loss on the revaluation of U.S. dollar denominated debt. The adjustments, shown net of tax, consist of unrealized fair value changes on financial instruments that are not necessarily indicative of future actual realized gains or losses, non-recurring gains or losses, or gains or losses reflecting corporate structure decisions.
Forward-looking information or statements included in this press release are provided to inform the Company's shareholders and potential investors about management's assessment of Capital Power's future plans and operations. This information may not be appropriate for other purposes. The forward-looking information in this press release is generally identified by words such as will, anticipate, believe, plan, intend, target, and expect or similar words that suggest future outcomes.
Material forward-looking information in this press release includes disclosures regarding: (i) expectations pertaining to the amendment of the Genesee Coal Mine Joint Venture Agreement regarding reduction to Capital Power's cost of coal and expected enhancements to the Company's net income, adjusted EBITDA, net cash flows from operating activities and adjusted funds from operations, (ii) expectations pertaining to the financial impacts of the acquisition of the Veresen thermal facilities including expected impacts to adjusted funds from operations and adjusted EBITDA, and (iii) expectations pertaining to the acquisition of Decatur Energy including expected impacts to adjusted funds from operations and adjusted EBITDA, and re-contracting of the facility.
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, expected future developments and other factors it believes are appropriate. The material factors and assumptions used to develop these forward-looking statements relate to: (i) electricity and other energy prices, (ii) anticipated facility performance, (iii) business prospects and opportunities including expected growth and capital projects, (iv) status of and impact of policy, legislation and regulations, and (v) effective tax rates.
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 the Company's expectations. Such material risks and uncertainties are: (i) changes in electricity prices in markets in which the Company operates, (ii) changes in energy commodity market prices and use of derivatives, (iii) regulatory and political environments including changes to environmental, financial reporting, market structure and tax legislation, (iv) facility availability and performance including maintenance of equipment, (v) ability to fund current and future capital and working capital needs, (vi) acquisitions and developments including timing and costs of regulatory approvals and construction, (vii) changes in market prices and availability of fuel, and (viii) changes in general economic and competitive conditions. See Risks and Risk Management in the Company's Management's Discussion and Analysis for the year ended December 31, 2016, prepared as of February 17, 2017, for further discussion of these and other risks.
Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the specified approval date. The Company does not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which any such statement is based, except as required by law.
Click here to view the management's discussion and analysis and consolidated financial statements.